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.
If you are interested in fixed income and follow the European markets, you probably already know about the reputation the Nordic Bond market has. It has hidden gems that are hard to find!
The Nordic market was one of the steadiest fixed income markets during the first half of 2018 and forecasts say that it will continue to be one. However, if you are looking for the real value picks among the corporate bond issues in this region, the rating isn’t what you should be looking at. Why? Well, for one, around 54% of the market is unrated and it is here that you’ll find the real good deals. The newly rated issuers are a proof of that.
Unrated got top rated
In September, the Swedish telecom operator, Tele2 received a solid BBB rating, while Danish logistics company DVS received an even higher BBB+ rating from S&P. These ratings reinforce that there are good quality issuers among the often-little-known Nordic unrated companies.
While there may be value picks, for the uninitiated, the biggest challenge here is entering the market. The first hurdle is the obvious one: Since they are not rated, how does an investor make sure he is picking the right bet?
To begin answering this question, first and foremost, you can’t enter the market if you don’t have a local guide. And by a local guide, we mean a local active investment manager who is not only based in the region but also knows the corporates operating here inside and out.
Since you cannot enter the market without having an active manager, rather than picking investment, the challenge is to pick the right analyst. What’s more? Since the issues are unrated, and everyone depends on his or her own knowledge and research, it is more or less speculation free. Which is a good thing. But it also means you won’t hear any whispers on the streets or get generic reports. So, you completely depend on your manager. Thus, the key is to find the right one.
Pick a cherry-picker
There are no ratings, however, there are huge opportunities. And while there is value, there are lemons in the market too that may drain your portfolio. Therefore, you need a manager with an A-grade credit analysis and a reputation to match.
One may question: how different can the credit matrix be? After all, the fundamental rules remain the same. It is here that the key ingredient, the localisation factor, kicks in. These Nordic value picks are often globally lesser known and unless you are from the region, it is difficult to identify them.
Take the example of Cargotec, a cargo-handling solutions company based in the region, where solid margin improvement led to improved credit metrics. Then there is Mercada, a real estate company which has issued a secured bond. However, one would never pick this one if you did not know that it has long lease agreements with Kesko, which is Finland’s leading retailer, making this a good paper to bank upon. Thus, knowing the company, its ownership and being aware of its business history becomes critical in this market.
Both these companies have large unrated holdings in our portfolio. Evli is also focusing hard on the so-called “crossover” credit sector. Meaning, investments where credit risk is similar to BBB-BB ratings. This is especially an interesting area as it gives you a mix of best of both worlds: the highest yielding investment grade (IG) names and the best quality high-yield (HY) picks from the market.
One has to also remember that the work doesn’t just end with cherry-picking the right issue. You need to have the right allocation and weightage mix as well, which only comes with skill and experience. The recipe we have been using so far has given us good returns. The Evli Nordic Corporate Bond has given a return of 8.17% between March 2016 to September 2018.
The track record is important here as these numbers cannot lie. It also helps build trust, a precious commodity in a market like this where almost everything depends on it.
Text: Petter von Bonsdorff
Petter von Bonsdorff, MSc (Econ), Head of International Business Development for Evli’s funds. Petter has served professional investors with investment solutions since 1993, and joined Evli in 1996.
Interested in further reading? Download the white paper The Nordic Corporate Bond Market.