Nordea On Your Mind: The financial life jacket

Corporate funding has changed significantly in the last seven years, but your options could narrow if markets take a turn for the worse.

Stormy waters: The range of funding options may have widened, but when conditions are less benign, make sure your safety measures are up to standard. Photo: piola666/gettyimages

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A  sea change
Nordic debt capital markets hit a turning point in 2012. In the prior ten years, Nordic large corporates issued some EUR 10-15bn annually in bonds, but since 2012 the market has trebled to around EUR 35-40bn per annum. The vast majority of additional bond issuance is in local currency by non-rated borrowers, with more moderate growth for rated corporates tapping EUR or USD bond markets.

Credit that
Looking at a sample of 80 Nordic corporate bond issuers (40 rated and 40 non-rated), we see that bank loans have shrunk from 51% to 36% of total funding for rated borrowers, and from 88% to 68% for non-rated borrowers, from 2006 to 2017. Moreover, actual bank lending is down some 50% and 30%, respectively, while undrawn credit facilities have doubled for rated borrowers and more than trebled for unrated borrowers, to serve as backup credit for the new bond funding.

Strong currents
With 25% of rated large corporate funding from bonds, Europe remains below the US, where the share has for more than a decade been 50%. There have been dual powerful drivers towards bond funding: new banking regulation after the global financial crisis have changed the economics of corporate lending for banks (poorer returns for longer tenors and weaker credits), and low interest rates have led to a hunt for yield among asset managers struggling to meet return targets for their portfolios, raising interest in riskier credits than government bonds. We expect these drivers to persist.

Not just leverage
Total net debt of stock exchange-listed Nordic companies (ex financials) has risen from EUR 80bn in 2001 to EUR 120bn, with almost the entire increase coming from the real estate sector. Nordic Net debt/EBITDA of 0.8x is at a long-term average level, modest, and like in the past lower than for Europe.

Ratings slip
But there is a clear downward rating migration in the total Nordic corporate bond stock, from an average S&P rating just below “A” in 2013 to just above “BBB” in 2018. Outside the mainstream, however, we note that European debt/EBITDA of 4.8x for Moody’s speculative grade-rated issuers is slightly above historical averages, and that the share of new loans in Europe which are “covenant-lite” rose from 33% in 2013 to 75% in 2017.

The financial life jacket
So, there is nothing wrong if you are a corporate and are now turning more to debt capital markets for your core funding. Just don’t assume those bond and commercial paper markets will always be benign. Shocks have made corporate bond markets dry up or even close in the past. Review what financial metrics are critical for access to funding, and what can be done operationally or strategically to protect them in any future downturn.

Avoiding the storm
Make sure you have a debt maturity profile and a liquidity position which gives flexibility. Make having access to several different funding sources a strategic priority. It is all about having your house in order before any storm starts brewing.

The experts
We have interviewed Marina Albo, head of Corporate Finance Group EMEA at Moody’s, Petter Jessen, Head of Finance, Treasury and Insurance at fertiliser group Yara, and Chief Analyst Andreas Zsiga from Nordea Credit Research.

Keep an eye out for our podcast. Report authors Johan Trocme and Viktor
Sonebäck go head-to-head with Nordea Markets chief editor Martin
O’Rourke. If you missed last month’s podcast on AI, you can find it here

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