Bloomberg News

Corporate Debt to Surge in Sweden as Bank Credit Dries Up

January 23, 2012

(Updates bond issuance in sixth paragraph, CDS prices in fourth-last.)

Jan. 20 (Bloomberg) -- Sweden’s corporate bond market is poised for a surge this year as companies abandon an “extreme” reliance on bank loans amid stricter capital rules, said Mats Carlsson, who heads the investment bank Pareto Ohman AB.

“The banks will be more conservative with their lending, while at the same time there will still be the same demand from companies,” Carlsson, who became chief executive officer at Pareto Ohman in July, said in an interview in Stockholm. “Supply will diminish and demand will grow.”

Sweden’s government wants the country’s lenders to target more rigorous capital standards than those set by the Basel Committee on Banking Supervision and has set a deadline that’s six years earlier than Basel’s 2019 goal. As the cost of bank credit rises, firms are seeking alternatives. With Swedish companies now relying on banks for 80 percent of their debt financing, versus about 30 percent in the U.S., the scope for a surge in corporate issuance is considerable, Carlsson said.

“There is a lot of room for bonds in Sweden,” he said. “We’re coming from an environment of very cheap lending for the companies and the issuers, the companies, have to adjust to a situation where they will have to pay higher interest.”

Martin Gorne, managing director at CorpNordic Sweden AB, a trustee company, sees “a lot of transactions in the high yield market” this year and expects to be a trustee in as many as 20 high-yield deals in 2012, he said in an interview.

Debt Issuance

So far this year, Swedish corporates and municipalities have issued 34.8 billion kronor ($4.9 billion), bringing sales to 11 percent of the amount sold in 2011, according to data compiled by Bloomberg. Among the main issuers were Securitas AB, a security and alarm company, which this month sold 400 million kronor in three year notes at 3.45 percent interest. TeliaSonera AB sold 1.1 billion kronor in debt on Jan. 13. The figures only reflect krona-denominated sales.

“We expect more and more companies to come to the market for financing and to try to find other financing sources,” Magnus Nilsson, a Stockholm-based fund manager at Catella Fondforvaltning AB, which manages $1 billion in fixed income assets, said in an interview.

According to Daniel Sachs, the chief executive officer at corporate bond investor Proventus, this year will see a greater demand from Swedish corporates to sell their bonds than there will be a supply of credit. At the same time, Sweden’s corporate debt market may face some hurdles to growth as it struggles to develop the infrastructure needed to attract more investors.

Banks Deleveraging

“There’s no doubt that the banks need to deleverage and the need for non-bank funding for mid-sized companies is increasing,” Sachs said in an interview. Still, Sweden’s corporate bond market “is underdeveloped and needs to develop in a number of dimensions,” he said.

Sachs said he welcomes moves such as SEB AB’s decision to create an index to track corporate bonds. Yet the gauge is “not a full index and the market is not transparent yet,” he said.

Sweden is also behind when it comes to the standardization of contracts on debt sales, according to Sachs. He says regulatory steps may be necessary to bring about the changes that are needed to enable real growth in the market.

Sweden’s corporate bond market is under pressure to develop fast as banks start trimming their balance sheets to meet more rigorous standards.

Capital Rules

The country’s financial regulator and central bank in November told Sweden’s four biggest lenders to target common equity Tier 1 capital of at least 10 percent from January 2013 and 12 percent two years later. Basel sets a 7 percent target, to be met by 2019. The rules affect Nordea Bank AB, Svenska Handelsbanken AB, SEB, and Swedbank AB.

“Rising capital requirements do make bank financing more expensive and our ambition is to shield our customers from the cost of the new regulation,” Rodney Alfven, head of investor relations at Nordea, said in an interview. “We’ve seen our clients increasingly interested in corporate bonds and we expect this trend to continue.”

Swedish firms may be able to take advantage of the Nordic country’s haven status as Europe’s debt crisis deepens. Sweden’s government, which boasts a budget surplus, pays 16 basis points less than Germany to borrow for 10 years. Investors are also attracted to debt issued in krona as a hedge against the euro.

Sweden’s currency, the world’s ninth-most traded, has gained 6 percent against the euro since a Nov. 28 low.

The largest Nordic economy will grow 1.3 percent this year, the central bank estimates. That compares with just 0.3 percent expansion in the euro area, according to the Frankfurt-based European Central Bank.

Default Swaps

The cost of insuring debt sold by the world’s biggest maker of air compressors, Stockholm-based Atlas Copco AB, costs 75 basis points, while a credit default swap on ball-bearing maker SKF AB is 78.3 basis points. The average among European rivals is 136.88 basis points, according to Bloomberg data.

“After the turmoil in Greece it became very hard to issue any bonds because investors were very cautious,” Gorne said of 2011 bond issuance. “I believe it will be more stable this year.”

Sweden’s haven status and better economic growth prospects than in the rest of Europe mean “investors, as well as issuers, will start to see the Swedish corporate bond market as an attractive opportunity,” Jonas Ranneby, a Stockholm-based credit analyst at SEB, said in an interview. “Given the new Basel III legislation, banks are also likely to be more selective in their use of their balance sheet.”

According to Per Brilioth, managing director at Stockholm- based investment firm Vostok Nafta Investment Ltd., “issuing bonds is often the best way for our companies to raise the money they need. Even though the bonds are high-yield, they are still cheaper than the alternatives. I’m sure we’ll see many others coming to the market this year.”

--Editors: Tasneem Brogger, Jonas Bergman.

To contact the reporters on this story: Adam Ewing in Stockholm at aewing5@bloomberg.net; Meera Bhatia in Oslo at mbhatia2@bloomberg.net.

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Christian Wienberg at cwienberg@bloomberg.net


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