Bloomberg News

Norway Assurances on Eksportfinans Debt Make Headway at S&P

December 09, 2011

(Updates with comment on DNB delayed bond sale in 12th paragraph, Eksportfinans yields in 15th.)

Dec. 8 (Bloomberg) -- Norway’s assurances that creditors at Eksportfinans ASA don’t face a default as the unit is wound down show the government is committed to averting a credit event, Standard & Poor’s said.

“We are listening carefully to what the owners say and what kind of commitment the owners are willing to make, relative to the company,” Per Tornqvist, a credit analyst at S&P, said in a phone interview yesterday. “We see that the government has a strong incentive to act in the best interest of the company in order to achieve its own interest.”

S&P cut Eksportfinans five levels to BBB+ on Nov. 25, three days after the state-backed lender was slashed seven steps to junk by Moody’s Investors Service. The downgrades followed the government’s decision to dismantle the state-backed unit after rejecting its pleas to waive capital rules. S&P said then it was investigating whether Eksportfinans’s euro medium-term note program already was in default, and warned more downgrades may come. The cuts sent tremors through credit markets as far as Asia as investors balked at the changed status of their bonds.

Since then, the government has defended its move as necessary to safeguard the country’s export industry and argued the lender, which was created in 1962 to support Norwegian sales abroad, still has the backing to honor all its debt obligations.

‘Strong, Solid’

Trade and Industry Minister Trond Giske said on Dec. 6 that Eksportfinans is “strong, solid and an important tool for the Norwegian government in ensuring the export industry’s good financing.” Asked whether there may be a default, Giske said “that is not up to me to decide. I don’t think the downgrade is justified.”

Eksportfinans is 15 percent owned by the Norwegian government. DNB ASA, Norway’s biggest bank, holds 40 percent, while 23.21 percent is held by Nordea Bank AB, the largest Nordic lender. Danske Bank A/S in Copenhagen owns 8.09 percent.

“The fact that Standard & Poor’s in particular addressed the event of a default issue has of course created a lot of work because the implications of that would be dramatic,” Geir Bergvoll, chairman of Eksportfinans, said by phone. “We are not able to see that, say we are in such a situation, that an event of default could be clear. Eksportfinans is, whether you go into the liquidity position or into the solidity position, absolutely 100 percent rock solid.”

‘Not Simple’

S&P said last month the CreditWatch negative on Eksportfinans’s BBB+ rating will be resolved after a review of “the consequences of the government action to end the most important part of Eksportfinans’ business on the creditors’ position.”

The status of the EMTN program “is a technicality and not simple,” Tornqvist said in the interview. “Our own lawyers came to the conclusion that, in spite of the company statement that they are not in breach right now, that this is not an evident conclusion. And that means we need to flag it, which we do through a CreditWatch action. The CreditWatch action may end up with the conclusion that ‘ok, fine, we affirm the rating and there is an outlook.’”

The downgrades sent yields on Eksportfinans’ benchmark 4.75 percent 1 billion-euro note due June 2013 surging to a record high of 9.58 percent on Nov. 30, up from 1.66 percent on Nov. 21. Yields on debt sold by DNB, 34 percent owned by the Norwegian government, and state-backed, AAA rated Kommunalbanken AB also rose.

Samurai Bonds

DNB Bank delayed the sale of the 20 billion yen ($258 million) in Samurai bonds planned for today, according to two people with direct knowledge of the matter who asked not to be identified as the information is private. Daiwa Securities Group Inc., Mizuho Financial Group Inc. and Nomura Holdings Inc. were hired to arrange the deal, according to a Nov. 22 filing with Japan’s finance ministry.

“My immediate take is that this is linked to the debacle around Eksportfinans,” said Jonas Shum, a credit analyst at SEB Merchant Banking in Oslo.

Japanese investors hold more than 1 trillion yen of Eksportfinans debt, including its Samurai and Uridashi notes, according to SMBC Nikko Securities Inc.

Norway, which boasts a $560 billion sovereign-wealth fund built from its oil income, is unlikely to let the lender default given the potential fallout of such a credit event, said Paal Ringholm, chief bond analyst at First Securities ASA. “They have strong incentives to prevent a default and they do have the tools to prevent one,” he said in a Dec. 6 interview.

Eksportfinans Bonds

The yield on Eksportfinans’ benchmark 4.75 percent note eased today to 6.43 percent at 9:44 a.m. local time today, the lowest since Moody’s Nov. 22 downgrade.

Eksportfinans has taken legal advice from two separate English law firms, Martine Mills Hagen, head of funding at the lender, said on a Nov. 28 conference call with investors. “Having considered their advice, we don’t believe that there’s an event of default,” she said.

Eksportfinans was one of Norway’s biggest issuers of bonds to foreigners. The government’s decision to wind down the unit affects bond holdings worth about $35 billion.

“We have already factored in an anticipation that, subject to the EMTN clause, we are looking at a BBB+ rating, and that is a high rating,” Tornqvist said. “That rating is built on an expectation that the owners, including the Norwegian government, have a self-interest in preserving the economic value of the company.”

--With assistance from Stephen Treloar in Oslo, Yusuke Miyazawa in Tokyo and David Yong in Singapore. Editors: Tasneem Brogger, Christian Wienberg.

To contact the reporter on this story: Meera Bhatia in Oslo at mbhatia2@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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