Rich pickings in Nordic market

FOR much of the past two decades, Europe’s northernmost countries have largely been considered a backwater in the corporate debt world. A recent influx of international investors has started to chip away at that image.

Foreigners have been drawn by the market’s increased issuance volumes as more companies test out the relatively hassle-free approach to issuing high-yield debt in Norway, Sweden and Denmark.

Half of the investors who have taken part in bond sales under local Nordic laws this year came from outside of the region, compared with around a quarter in 2023, according to data from Arctic Securities.

“The main growth we are currently seeing is participation from US investors,” says Alexander Jost, head of research at the Oslo-based investment bank, which arranges Nordic high-yield bonds. “The change has been dramatic.”

For those who can stomach a more illiquid market, it offers a chance to pick up juicier returns than in Europe or the United States.

Bond issuance volumes are on track to hit a record this year, with recent deals including a CCC+ rated bond from KKR & Co Inc’s Flora Food Group, a debut from Malta-based private jet charter firm AirX Group Holdings Ltd, and DSI Holding GmbH, a Germany-based manufacturer of infrastructure components.

The region is also proving popular with equity investors, with Stockholm hosting three of the five biggest stock listings in Europe so far this year. 

Alternative finance

The Nordic high-yield market evolved from the wreckage of the global financial crisis, when local small and-medium-sized companies started to seek alternative sources of financing after banks became more reluctant to lend to riskier borrowers. 

They found that Nordic asset managers, pension funds and family offices were willing to buy their bonds and so a highly localised market was born.

Since fund managers from the region were so familiar with the broader market backdrop, they were happy to do their own credit analysis rather than relying on an official rating. 

Today that legacy remains even as companies and investors enter from outside of the region. Firms that have raised more than €15bil (US$17.7bil) in the Nordics so far this year typically haven’t needed credit ratings or even a formal prospectus initially.

For some small issuers, that makes it even more attractive than direct lending, a sector that has boomed in recent years as smaller companies look for more flexible ways to raise money.

“Most of the issuers we work with are debating between private debt and a Nordic bond,” says Thomas Eriksen, head of credit research at Pareto Securities, an Oslo-based bond arranger. “Private debt, you are talking about a process lasting two to three months with a limited number of investors, whereas with the Nordics it is a matter of weeks with a range of investors.”

Default risk

The Nordic high-yield market isn’t for everyone and there are clear limits to how much it can grow. 

The dynamics of the market mean it primarily caters to companies looking to raise a few hundred million dollars or less, making it ill-suited to financing the kind of multibillion dollar leveraged buyouts typical of the European high-yield market.

Defaults are also higher, reaching more than 5% in 2024, compared with less than 3% in the European market, according to data from Nordic Trustee and Fitch.

Issuers that are currently facing stress include Germany’s Nordwest Industrie Group, an investment company co-owned by the family of businessman Kurt Zech.

The company issued a €50mil bond last October, but now faces a debt restructuring that will see it sell off assets to pay down debt. A spokesperson confirms the negotiations and says the firm is aiming to fully repay the Nordic bond as well as its loan liabilities.

Another is the Ritz-Carlton Yacht Collection, an ultra-luxury cruise line backed by private equity firm Oaktree Capital Management. The firm told investors in June it needs hundreds of millions in support, and shareholders have already stumped up additional capital.

Better terms

Still, the market is providing a lifeline for companies from more challenging sectors that might otherwise struggle to raise funds.

BOS GmbH & Co KG, a German auto-parts supplier, sold a €150mil bond in June to refinance its bank debt with a floating-rate coupon now yielding around 11%.

For some investors, the setup is more attractive than the European and US high-yield markets, where big asset managers awash with inflows are willing to accept weaker conditions in order to deploy capital.

New York-based CrossingBridge Advisors set up a Nordic bond fund in mid-2024 to gain exposure to the market’s tighter covenants and lower leverage levels, according to founder and chief investment officer David Sherman.

In the Nordics, there’s less competition for each deal, so investors are able to negotiate better terms and pricing, says Steve Roth, founder of Rhodon Investment Management, who was previously head of credit and convertibles at Man GLG.

He estimates that Nordic deals from comparable credits can yield as much as 200 basis points more than deals from the European market.

“US and European high yield has become heavily skewed in favour of larger investors,” Roth says. “By contrast, the Nordic market tends to treat all investors more fairly.” — Bloomberg