International giants often overlook the Nordic market. Here’s why you should pay attention to the North.
1. Excess return
When you compare unrated Nordic bonds with officially-rated euro corporate bonds that are at a similar risk level, the former offer returns in excess of 50-150 bps. These kind of returns in a zero risk-free interest rate environment is a hidden gem.
2. Lower volatility
Unrated Nordic bonds have historically had lower volatility than rated, European peers. Traditionally, Nordic issuers have often turned to local institutions for funding, especially when issue sizes, at an international level, have been smaller. In such cases, they have operated without the help of international credit agencies. Hence, the majority of Nordic unrated bonds are held by local institutions. These are very much ‘buy-and-hold’ owners of the bonds. In other words, Nordic unrated bonds are not held by international giants or trading oriented portfolios, which tend to get cold feet when markets turn sour and cause unnecessary volatility, regardless of the valuation.
3. Full transparency
Unrated Nordic bond issuers are often publicly-listed companies. They have a long equity market history and boast transparent financials. Since their equity is listed, they disclose quarterly financials with outlook guidance. These companies are both well-known and widely followed by local investors. The fact that the management of these companies is easily accessible to local investors creates transparency and acts in the favour of the companies.
4. Stable environment
Nordic countries often top various global rankings. For instance, Iceland is ranked the safest country in the world, Norway, the happiest, and Denmark, the least corrupt. While Finland holds the title for having the soundest banks, Sweden tops the UN’s sustainable developments goal index. This, in short, means unrated Nordic bond issuers operate in a home market with high predictability and transparency, long-lasting political stability and lowest corruption-rate. All of which spells a stable environment.
5. Active management
Another big advantage for unrated Nordic bonds is that they cannot be accessed through passive investing, as there are no indices for the market. This way, the market very seldom becomes a ‘crowded trade’. Passive instruments don’t care about valuations, they can buy expensive and sell at a discount. The only determining factor is the inflow or outflow of money to the passive instrument. Also, algorithms and other computerized portfolios use passive instruments to buy or sell market exposure. These attributes easily create excess noise and higher volatility. In this scenario, unrated Nordic bonds remain unscathed since a clear majority of investment decisions are made by (local) investors with genuine knowledge of the companies, which means valuations always matter and bigger market mispricing doesn’t happen.
6. Undiscovered gems
Nordic fund managers have a vantage point when it comes to unrated Nordic bonds. They are aware of the companies’ history and resources and use that knowledge to assess and monitor the true credit quality and stability of future cash-flows. International giants often overlook the Nordic market, because they see it as too diverse. It is true that you need to be a local to understand the locals - the local mentality, language, customs and the fact that every word counts. This is perhaps why unrated Nordic bonds can genuinely be assessed only by Nordic fund managers.
7. Good liquidity
The unrated Nordic bond market is big and liquid enough. It comprises almost 300 issuing companies, roughly the same as that of Euro HY companies, and its market size is about EUR 150bn. Of this total market, about 70 per cent of issuers and 20 per cent of volumes are unrated, which translates into 200 companies and EUR 30bn, in volume. This spells a big market with lot of opportunities.
However, a word of caution; not all unrated Nordic bonds are of the same good quality with higher returns and lower volatility. There are a lot of bonds, even beyond high-yield risk, that are issued by companies that don't have a stable, predictable, and free cash-flow, let alone low volatility. It is only made up of wild, shallow promises that may not bear fruit in the future.
So, enjoy the unique risk-reward of the Nordic unrated bonds, but think before you pick!
Marco Granskog, MSc (Econ), Director at International Business Development for Evli’s funds. Marco has served both institutional investors and affluent clients with investment solutions since 1990. Marco joined Evli in 2017.
Interested in further reading? Download the white paper The Nordic Corporate Bond Market.