Bloomberg News

Norway Derides Default Risk at ‘Strong, Solid’ Eksportfinans

December 13, 2011

(Updates yield on Eksportfinans note in eighth paragraph, analyst comment in ninth.)

Dec. 7 (Bloomberg) -- Norway’s government signaled it sees little risk of Eksportfinans ASA defaulting on its obligations even after the state-backed lender was downgraded to junk in response to last month’s decision to wind down the unit.

Trade and Industry Minister Trond Giske said Eksportfinans is “strong, solid and an important tool for the Norwegian government in ensuring the export industry’s good financing,” in reply to Bloomberg questions in Oslo yesterday. 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.”

Moody’s Investors Service on Nov. 22 cut Eksportfinans seven levels to Ba1 four days after the government said it will dismantle the unit because it was in breach of capital rules limiting loans to single industries. The move disrupted credit markets as far as Japan as bondholders learned that securities they thought were backed by a AAA sovereign were no longer investment grade. Still, Norway 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 in Oslo.

“They have strong incentives to prevent a default and they do have the tools to prevent one,” Ringholm said in an interview yesterday.

Standard & Poor’s warned on Nov. 25 that Eksportfinans’s euro medium-term note program may already be in default. S&P cut the lender five steps to BBB+.

Legal Advice

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, which was set up in 1962 to support Norwegian exporters, was one of the Nordic country’s biggest issuers of bonds to foreigners. The government’s decision to wind down the unit affects debt investors holding $35 billion.

The yield on Eksportfinans’ benchmark 4.75 percent 1 billion-euro note due June 2013 surged to a record high of 9.58 percent on Nov. 30, up from 1.66 percent on Nov. 21. The yield was at 6.80 percent today, according to Bloomberg composite prices. The likelihood the government won’t allow a default may make the bonds an attractive buy, according to Ringholm.

‘Buying Opportunity’

“I don’t say there aren’t any risk factors but especially for long-term investors I see a buying opportunity,” he said.

Eksportfinans is 40 percent owned by DNB ASA, Norway’s biggest bank, 23.21 percent by Nordea Bank AB, the largest Nordic lender, and 8.09 percent by Danske Bank A/S in Copenhagen. Other owners include a number of smaller Norwegian banks as well as BNP Paribas SA, which holds 0.03 percent. The Norwegian government holds 15 percent.

Yields on bonds from DNB, which is 34 percent owned by the government, also rose after the downgrades. The yield on its benchmark 4.5 percent 2014 note jumped about 0.66 percentage point in the week Eksportfinans was downgraded, to 3.16 percent. The yield on AAA rated Kommunalbanken AB’s $1 billion bond due in October 2014 has also risen.

“The potential negative outcome of Eksportfinans would have negative effects for funding costs of Kommunalbanken and potentially also DNB,” Ringholm said. “It is rational for Norway, for the government, to ensure that no large default will happen.”

Uncoordinated Decision

Giske faces criticism over his ministry’s decision not to inform Eksportfinans’s other owners of the wind-down plan. Geir Bergvoll, Eksportfinans chairman, said he wasn’t told until about an hour before Giske and Prime Minister Jens Stoltenberg held a press conference on Nov. 18 announcing the move.

“This was a government decision and we had to inform all actors at the same time to ensure the field of competition being just,” Giske said.

“That we were working on a government solution, and that that was one of the options, and a very likely one, that was known a long time before the announcement so it was up to all actors to decide what to do and how they would prepare for the situation that a government solution would be the end result. I don’t think they were surprised,” he said.

--Editors: Tasneem Brogger, Meera Bhatia.

To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net

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


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