Norways sovereign rating fundamentals are among the strongest in the world, and as the sovereign itself has not issued bonds in recent years, investors turn to local government funding agency Kommunalbanken Norge for exposure. And amid a eurozone and US debt crisis, investors have been crying out for that exposure, keen to find pockets of paper removed from either situation.
"KBN paper has performed well throughout the crisis," says Marius Ruud, senior vice president in the funding department at Kommunalbanken. "Some of it might be due to the strong economy that Norway has. One other factor can be that Norway is not a member of the EU."
Norway is closely associated with the European Union through its membership in the European Economic Area (EEA). But that distance, together with favourable economic metrics, has won Norway and KBN plenty of popularity over the last year.
Norways five year CDS was trading around 47bp at the start of September 2011, having started the year at 23bp, according to Markit data. Its a widening, but the numbers are better than the haven of the eurozone, Germany, which has five year CDS at about 84bp, having widened from 56bp in January.
Driven by its oil resources, Norways GNI per capita was the second largest in the world in 2009. Large oil revenue has brought about fiscal and current account surpluses almost every year since 1990, leaving the country far removed from the debt problems plaguing the rest of the eurozone. Its net general government creditor position, at 29% of GDP, is superior to any other triple-A rated sovereign.
The global financial crisis affected the Norwegian economy less severely than most of its peers in part because of interest rate cuts, a large fiscal stimulus package and increased liquidity support for the banking sector. The recession was relatively shallow, with GDP declining by 1.5% in 2009 compared with the AAA median of 3.7%, according to Fitch.
The demand for exposure to Norway, and by extension bonds from KBN, shows no signs of abating. But the agency, rated Aaa/AAA, continues to approach the capital markets with restraint, planning on doing only one further benchmark deal this year in the public markets. The agency has made clear its intentions in the primary market for 2011 a deal planned for the autumn will be the last of three that were announced in KBNs funding plans at the start of the year.
"We still have one more dollar benchmark to do this year between mid-September and November," says Ruud. "It looks like it will be a 144A with a five year maturity with a size of at least $1bn, but nothing has been decided when it comes to maturity and the exact size is too early to say. We have no need for benchmark size funding longer than five years."
The 144A market has been especially fruitful for KBN this year, using it for a further two benchmark deals amounting to $3bn, bringing the total number issued under this programme to four. Its debut 144A bond was last year.
Fruitful dollar market
The basis swap for issuers funding their dollar needs with euro-denominated bonds remains deeply negative, offering issuers a large cost saving by borrowing internationally in dollars. Although non-European investors at times kept away from some European credits, in summer 2010 appetite returned.
European supranationals and agencies were also driven to the dollar market by uncertainty in the euro. And KBN was one of the first to acknowledge the good demand in dollars and take action in setting up a programme in this format.
"The 144A deals allow us to reach institutional investors in the US were the only triple-A agency in Norway so the demand for our bonds is good," says Ruud.
KBN has raised $18.5bn of its $20bn funding target so far this year. As well as planning another benchmark, it also remains open for niche currency deals and private placements. KBN had planned to issue 20%-30% of the $20bn in the benchmark market, the same proportion in private placements, 20%-50% in the retail market and 15%-25% in the niche currency bonds market. Those proportions will be similar in 2012.
KBN remains a popular user of the MTN market, praised for its flexibility with structured products and its successful courting of the Japanese retail market. Japan has accounted for around half of Kommunalbankens funding in each of the last two years.
"Our Uridashi volumes are up compared to last year but our private placement activity otherwise is stable," says Ruud. "Weve already placed $3.3bn in private placements so far this year though, so were on track to hit a similar level to last years $4.5bn in private placements."
Even KBNs structured note issuance has been healthy, with investors continuing to request the lightly structured deals that have been popular over the last two years.
"In terms of our structured note issuance, Japanese investors are keen on equity deals and US investors prefer 144A FRN and fixed rate notes," said Ruud.
Norways economic strength as a country is certainly helping KBN access the market with ease. But the agencys restraint and flexibility in the bond market is capitalising on that advantage.