Bloomberg News

Eksportfinans Double Junk Grade Betrays Political Missteps

February 17, 2012

(Updates Eksportfinans bond in ninth paragraph.)

Feb. 16 (Bloomberg) -- The failure of Norway’s government to persuade Standard & Poor’s to keep state-backed Eksportfinans ASA investment grade is drawing criticism from investors and analysts confused by signals sent before yesterday’s downgrade.

“It’s a politically rather messy process which has resulted in a fragile funding situation,” said Paal Ringholm, head of credit research at Swedbank First Securities in Oslo. “Obviously, we are surprised over this conclusion, given the statements” from the government, said Jonas Shum, a credit analyst at SEB Merchant Banking in Oslo.

Trade Minister Trond Giske in a Dec. 6 interview described Eksportfinans as a “strong, solid” company that enjoyed government backing and said a spate of downgrades in November was unjustified. Yet S&P said yesterday it felt compelled to cut Eksportfinans to junk after the Norwegian government proved unwilling to provide the kind of backing needed to keep the lender investment grade. Moody’s Investors Service downgraded Eksportfinans to junk in November.

“They have stressed that they are an owner of the company but not more than that,” said Per Tornqvist, an analyst at S&P, in a phone interview. “They are not providing support in such a form that it would drive the rating higher. Our view is that the government no longer is supportive relative to Eksportfinans.”

Government Response

Norway’s Finance Ministry is satisfied that the company has “good liquidity and solvency,” adding that the lender’s owners “expect to fulfill all its obligations,” according to an e- mailed reply to questions sent by Tor Audun Gram, a ministry spokesman.

The November downgrades shocked credit markets around the globe and sent tremors through bond markets as far as Japan, where investors hold more than 1 trillion yen ($12.7 billion) of Eksportfinans debt, including its Samurai and Uridashi notes, according to SMBC Nikko Securities Inc. The lender has about $35 billion in bonds outstanding.

S&P will no longer treat Eksportfinans as a government related entity and lowered the lender to BB+, the highest non- investment grade, with a negative outlook. The cut follows a five-step downgrade to BBB+ on Nov. 25.

‘Take Action’

The Finance Ministry in Oslo said the government and the central bank remain vigilant in monitoring financial markets for stresses after yesterday’s downgrade, saying the authorities are ready “to take action” to prevent any “serious consequences for the Norwegian financial markets and the real economy” should such a situation arise, according to an e-mail.

The yield on Eksportfinans’ 4.75 percent 1 billion-euro note maturing June 2013 eased to 5.44 percent today, from 5.58 percent yesterday, according to generic Bloomberg prices. The yield, which traded below 2 percent before Moody’s November downgrade, soared to almost 10 percent on Dec. 1.

Eksportfinans is 15 percent owned by the Norwegian government. DNB ASA, the country’s biggest bank, holds 40 percent, while 23 percent is held by Nordea Bank AB, the largest Nordic lender. Danske Bank A/S in Copenhagen owns 8.09 percent.

Norway has defended its move to wind down Eksportfinans as necessary to safeguard financing for the country’s exporters, arguing the lender still has the backing to honor its obligations. The government will provide direct credit to exporters after winding down Eksportfinans.

‘Never Stronger’

“Giske said that the support has never been stronger,” Arne Eidshagen, a fund manager at Alfred Berg Kapitalforvaltning in Oslo, which manages $4.9 billion and holds $13.9 million in Eksportfinans bonds, said in an interview. “There must have been something that hasn’t gone right in the communication.”

“I’m not sure who’s to blame. All in all it turned into a big mess,” he said, referring to events since November. As a high-yield investor, Eidshagen said he’s benefiting from the turmoil. “Eksportfinans has become my biggest exposure. Except for investors like me, everyone else is a loser in this situation.”

The government said Nov. 18 it decided to dismantle Eksportfinans, created in 1962 to aid exporters, after rejecting the lender’s pleas to sidestep European capital rules limiting loans to single industries. Under the new regulations, the company would have had to increase capital levels fivefold, according to S&P, which rated Eksportfinans AAA until June 2001 and AA until three months ago.

Poorly Handled

“The whole Eksportfinans affair was poorly handled by the government initially, and that was very damaging to Norway’s reputation,” said Espen Furnes, an Oslo-based fund manager at Storebrand Asset Management, which oversees $72 billion. “Quite frankly, given how it was handled last time,” yesterday’s downgrade to junk “is not a surprise,” he said.

Japan’s Securities Dealers Association wrote to Norway’s government last month urging it to keep talking to the rating companies, according to a copy of the letter obtained by Bloomberg.

“If big shareholders including the government make it clear that they support Eksportfinans properly or complement its credit, Eksportfinans can be upgraded to an investment level,” Atsushi Sakiyama, a spokesman for JSDA, said by phone on Feb. 2.

To restore Eksportfinans to investment grade, the government would need to show it can remove risk from the lender’s balance sheet or put in place a guarantee scheme, “which means you transfer the risks of Eksportfinans to whoever is the guarantor,” Tornqvist said. “Obviously such a guarantor would have to be investment grade.”

Norway’s government didn’t indicate it was planning such a move in its talks with S&P, Tornqvist said.

According to Jani Kurppa, a bond investor in Helsinki at EQ Asset Management Ltd., which manages $4.7 billion in assets, there is “certainly frustration” over the handling of Eksportfinans, “but no fear of default.”

“It’s not good news that S&P thinks Eksportfinans has lost government support,” he said in an interview. “S&P gave the company some time to work, but no solution was found, I guess.”

--With assistance by Adam Ewing. Editors: Tasneem Brogger, Jonas Bergman.

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

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net


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