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Eksportfinans Demise Reveals Risks Lurking in AAA Norway

December 06, 2011

(Adds today’s bond price in fifth paragraph.)

Nov. 29 (Bloomberg) -- The downgrade to junk and forced resolution of partly state-owned lender Eksportfinans ASA has reminded investors there’s risk even in AAA rated Norway.

The government’s decision on Nov. 18 to wind down Eksportfinans after it failed to meet stricter capital standards roiled investors holding about $35 billion in bonds that had been backed by an Aa3 grade. The move, and Moody’s Investors Service subsequent seven-step downgrade, sent yields surging on debt from Norway’s biggest bank DNB ASA, and even on AAA rated state-backed lender Kommunalbanken AS. Credit default swaps on Norwegian sovereign debt jumped to the highest in seven weeks.

“This was a wake-up call for investors,” said Espen Furnes, an Oslo-based fund manager at Storebrand Asset Management, which oversees $72 billion. “Norway isn’t insulated from the turmoil as many thought previously. This has indeed brought higher funding costs to Norwegian financial companies.”

Norway, which has a $530 billion fund built from oil wealth backstopping its economy, has so far been shielded from the contagion spreading from Europe’s debt crisis. The nation boasts the world’s biggest budget surplus of any AAA state and Europe’s lowest jobless rate. Yet the demise of Eksportfinans, which was one of Norway’s biggest issuers of bonds to foreigners, shows there are risks lurking inside the Nordic country’s credit markets as erstwhile state-backed units switch status.

The yield on Eksportfinans’ benchmark 4.75 percent 1 billion-euro note due in June 2013 has surged 6.76 percentage points since the government’s announcement. The note fell 0.37 cents to 95.007 cents on the euro today, pushing the yield up 28 basis points to 8.34 percent as of 8:57 a.m. in Oslo.

Dumping Bonds

Investors also sold bonds by DNB, which is 34 percent owned by the government, causing yields on its benchmark 4.5 percent 2014 note to jump about 0.66 percentage point last week to 3.16 percent. The yield on Kommunalbanken’s $1 billion bond due in October 2014 has risen 0.20 percentage point to 1.29 percent since last week, a record high. The yield difference to U.S. government benchmarks widened 19 basis points to 55 basis points since last week, the most since July 8, 2010.

Norwegian lenders with links to the government reminiscent of those at Eksportfinans before Nov. 18 are eager to prove to investors they won’t suffer the same fate.

“Because of the turmoil around Eksportfinans it’s the logical step for investors to ask whether the Norwegian government would stand fully behind us,” Petter Skouen, chief executive officer of Kommunalbanken, said by phone last week from Costa del Sol, Spain. “They are 100 percent behind KBN. Business is just as usual, we’re not scaling down our lending.”

No Default Events

The government on Nov. 18 said it will wind down Eksportfinans, which was set up in 1962 to help foreign investors buy Norwegian goods, after denying the lender permission to waive European capital rules limiting loans to single industries. Instead, Prime Minister Jens Stoltenberg announced a plan to provide direct financing to aid Norway’s export industry.

Moody’s Investors Service on Nov. 22 slashed Eksportfinans’ rating to Ba1 from Aa3, while Standard & Poor’s three days later cut the lender five steps to BBB+ and warned more cuts may come.

Eksportfinans, which had 205 billion kroner ($35 billion) in debt as of Sept. 30, will reduce that to 41 billion kroner by 2017, the company said in statement on Nov. 27.

“To date no event of default has been declared by any party under any of our agreements,” Martine Mills Hagen, head of funding at Eksportfinans, said on a Nov. 28 conference call with investors. “Eksportfinans has taken legal advice from two separate English law firms and having considered such advice we don’t believe that there’s an event of default.”

‘Quite Satisfied’

Moody’s contacted Kommunalbanken at the end of October, when it first downgraded Eksportfinans two levels from Aa1, and was “quite satisfied” with the feedback it got from the government, Skouen said. The Local Government and Regional Development Ministry issued a statement on Nov. 22 reaffirming its commitment to Kommunalbanken.

Eksportfinans is 15 percent owned by the Norwegian government, while 40 percent is held by DNB. Nordea Bank AB, the largest Nordic lender, holds 23.21 percent, and Danske Bank A/S, based in Copenhagen, owns 8.09 percent.

Thomas Midteide, a spokesman at DNB, said that while the Oslo-based lender has noticed “increased concern” about banks it doesn’t expect any losses from Eksportfinans. Sigurd Carlsen, head of planning and development group risk management at Nordea, said the Eksportfinans situation was “irrelevant” to the other Norwegian lenders’ business.

Financing Change

“We have a situation for Eksportfinans which is triggered by a change in the export financing scheme in Norway,” he said.

Still, the episode may rekindle investor concern over potential losses at banks that focus lending on single industries such as shipping, which had been Eksportfinans’ fastest growing market.

DNB and Nordea, which steered clear of the U.S. subprime meltdown and the worst of Europe’s debt crisis, are battling slumping tanker rates. Frontline Ltd., the largest operator of the biggest crude tankers, said last week it may run out of cash in 2012. DNB is the second-largest lender to the shipping industry, while Stockholm-based Nordea is the fourth, according to Petrofin. HSH Nordbank AG is the biggest.

Tanker rates slumped 65 percent since the start of 2010 as a glut of vessels overwhelmed growth in oil demand. The global shipping industry faces a funding shortfall of $21.3 billion to $34 billion over the next three years, according to Athens-based consultant Petrofin Research.

Shipping Lending

Lending to shipping represented 11.6 percent of DNB’s loan portfolio at the end of the third quarter, said Andrius Valivonis, an analyst at Terra Markets, who has a “buy” rating. Terra estimates loan losses, including shipping, at 810 million kroner for DNB in the fourth quarter, up from 529 million kroner a year earlier.

The risks associated with lending to single industries may also be lurking in other corners of AAA rated Scandinavia.

In neighboring Denmark, Moody’s last week placed the A2 ratings of the country’s ship finance company, Skibskredit A/S, on review for a downgrade citing “continued volatility in shipping-freight rates and vessel values in 2011.” The lender’s weakness lies in a loan portfolio “concentrated on relatively few exposures” creating a “vulnerability to single- name credit events,” Moody’s said.

--Editors: Jonas Bergman, Tasneem Brogger.

To contact the reporter on this story: Meera Bhatia in Oslo at

To contact the editor responsible for this story: Tasneem Brogger at

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