Why Nordic companies don’t worry about ratings

Most Central European investors invest only in officially rated corporate bonds. But a majority of Nordic companies are unrated and are doing just fine. We met up with Nordic CFOs to find out why.

While official ratings are a big deal in Europe, in the Nordics, most companies are not rated by any of the major rating agencies. In fact, more than half of the Nordic issuers are unrated, which means companies that pay more coupon than their rated peers may remain unnoticed, even though their credit fundamentals might be better. 

The reasons why Nordic companies are often unrated range from easy local funding to good credit research coverage. The latter ensures that valuation comparisons are not a problem.

Unrated? Not a problem

Take the case of the Axzon Group, which successfully completed a 4-year bond issue of EUR 135 million in May of this year.

"We are very pleased with the road show we held in the Nordic market in the spring", says Hans Henrik Pedersen, CFO of the Danish agricultural company The Axzon Group.

Axzon group is a Danish agricultural and food production company with four production units across Europe. Its largest customers are blue chip European retailers. The company employs approximately 2,400 people.

In the past three years, the company has been investing significantly in increased production capacity and further processing facilities. These expansions have been financed through individual loans with local banks as well as international finance institutions.

"We then decided to refinance our loan portfolio with a corporate bond to clean up the structure", Pedersen says.

Refinancing provides a more stable financing structure, which enables the group to pursue further business development opportunities.

Bonds sold to Nordic investors

Axzon met Nordic investors in Denmark, Norway, Sweden and Finland. The outcome of the road show was very positive – the bonds were sold within a day, primarily to investors in the Nordic countries. For Axzon, it was the first time they had been financed by the bond market.

And as is the case with many other North European companies, Axzon is not officially rated.

Pedersen recalls that this didn't raise any questions during the road show. If the quality of the credit is good, the company's official rating doesn’t need to be an issue to the investor.

"Nordic investors are very used to unrated corporate bonds", he says.

Acquiring official rating is an investment. However, it may not be a beneficial process for all companies, at least for ones which are not regular issuers and whose issue sizes are relatively small.

"We wanted to be agile and efficient. If we had gone through the rating process, securing financing would have taken much longer", Pedersen says.

Kemira attracts investors

Getting an official rating has also held little appeal for Kemira, whose bond issuances have proved attractive to investors. Being a blue-chip company with a solid track record, Kemira has a good standing with analysts and investment houses.

Kemira is a global chemicals company with customers in water intensive industries such as paper and pulp, municipal and industrial water treatment, oil and gas and mining. In 2016, Kemira had annual revenue of EUR 2.4 billion. Chemicals are a globally growing industry and most of Kemira’s main competitors have an official rating, yet Kemira does not. Why is that?

“It is rather simple, really. We are smaller than most of our competitors, thus our need for capital is smaller and less frequent”, explains CFO Petri Castrén.

The investors in regional market know their companies well

“When we issue corporate bonds of EUR 100-200 million, a large part of investors are Finnish institutions, banks and brokers, which have good skills in credit analysis. In Nordic countries, companies are fewer and smaller than elsewhere, so it is possible for investors to gain a very good knowledge of them. The market knows how to price the risk”, summarises Castrén.

From Kemira’s point of view, the pros of rating such as cheaper funding have not so far outweighed the cons. In addition to costs, rating requires time and resources. Kemira is an equity-listed blue-chip company with good equity ratio and well known in large investment houses as it is.

Maintaining good investor relations pays off

Last May, Kemira issued bonds of EUR 200 million and bought back bonds of EUR 100 million. “Almost 2/3 of our bond investors are in Finland, the second largest group comes from other Nordic countries and the rest from elsewhere in Europe”, tells Castrén.

“We value our investor relations”, Castrén says. Prior to latest bond issue, Kemira arranged a road show in Helsinki, Stockholm and Copenhagen for large investors. Kemira’s Investor Relations unit serves both equity and bond holders. Both are included in annual investor meetings and informed about company matters.

“Our investors are the ones who finally decide, what is required from us. Should the market change, we will adapt to that”, emphasizes Castrén.

How would you pick a good investment in a market that doesn’t have a benchmark and where most issues are unrated? Navigating the unrated Nordic bond market isn’t possible unless you have a good active investment manager by your side.

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