Nordic currency bond markets are having a lively year, with a big increase in issuance by local companies, especially in Swedish kronor. For foreign issuers, the draw has been the Icelandic króna and Norwegian krone. As Joe Carstairs reports, investors appetite for the yields available in these currencies is as keen as ever.
Its easy for capital markets specialists in London or Frankfurt to lump the Nordic currency bond markets together. But the characters of the markets differ hugely, and very different dynamics have been driving them over the past year.
The first eight months of 2007 (up to September 10) have been extremely busy in the Nordic debt markets as a whole. Dealogic figures which exclude domestic government debt and the large local mortgage bond markets record Eu13bn of issuance, up from Eu7.7bn equivalent in the same period of 2006.
That growth comes from diverse sources. The big increase is in deals from Nordic issuers. These have grown from Eu2.2bn in the 2006 period to Eu6.4bn so far this year from 29% of the market to 49%.
These are deals from the blue chips of Nordic industry Volvo, Fortum, Atlas Copco, Scania, Ericsson as well as some from state entities and banks, notably DnB Nor.
In this local market, the Swedish krona is dominant 88% of the market in 2006, 70% in 2007.
Norwegian krone issuance has increased tenfold to Eu1.7bn, but Icelandic króna output remains tiny and the Danish krone non-existent.
Running alongside this market is a linked, but very different world of deals by overseas issuers. Here, the leading issuers are the likes of KfW, the European Investment Bank and Rabobank, as well as many of the worlds biggest banks and investment banks.
Growth here has been a solid 21%, from Eu5.5bn of issuance in the first eight months of 2006 to Eu6.6bn this year.
Hunting new investors
"For Rabobank, the main reason for issuing in these currencies is to diversify our investor base and to provide them with different products," says Sjaak-Jan Baars, funding officer at Rabobank in Utrecht.
Rabobank is one of the most prolific issuers, having sold bonds in the Swedish, Norwegian and Icelandic currencies.
Horst Seissinger, head of capital markets at KfW in Frankfurt, agrees that funding diversification is key. "Because we have funding targets of Eu60bn it is important to have exposure to Nordic currencies and the investors they provide," he says. "These currencies play a role that it would be an exaggeration to say was a big role, but one that contributes to KfW funding. It also enables us to reach investors in one asset class that may then be interested in investing in some of our other products."
KfW issued Nkr6bn worth of Norwegian krone Eurobonds in all of 2006; so far this year it has sold Nkr3.2bn (Eu405m). In Icelandic krónur, it raised Ikr58.5bn last year, and Ikr26bn (Eu290m) so far in 2007.
What separates the market for deals by non-Nordic issuers from the local corporate bond markets is the influence of speculative overseas investors. Like the issuers, they have no particular allegiance to one currency or another, but just want to play the regions interest rates and currencies.
The result is a fast-changing market where currencies go in and out of fashion every year. And although issuers can stimulate demand by bringing deals, they ultimately have to follow the investors.
"Our issuance in Icelandic krónur and Norwegian kroner is primarily driven by investor demand," says Seissinger. "We have not seen the same levels of demand in other Nordic currencies so we have concentrated on Iceland and Norway."
The composition of the offshore-issuer Nordic currency bond market has changed completely since 2006. Last year 40% of deals were in Swedish kronor, followed by Icelandic krónur which first appeared as a significant Eurobond currency in 2005.
This year, the Icelandic króna has vaulted to the top of the charts with Eu2.6bn of issuance. The Norwegian krone has also expanded, achieving parity with Swedish krona on Eu1.8bn.
"Iceland is attractive to investors because of the high coupons available and among FX investors, who see some continuing currency appreciations," says Baars. "Norway and Sweden have a far more attractive economic story, backed by strong fundamentals. For Norway in particular, there is low unemployment and low inflation rates. Investors in Norwegian krone also have fewer options to choose from because the government doesnt need to issue."
The individuality of the Icelandic market is reiterated by Steve Dirou, emerging markets/non-core dollar syndication at RBC Capital Markets in London, who prefers to compare it to niche markets outside the Nordic region.
"Various currencies have come into vogue since we have been involved in the Eurobond market," he says. "South African rand was the first. Since then Mexico, Hungary and Iceland have gained in popularity with investors.
"The double-digit short end yields available in Iceland continue to be attractive to investors. Higher yields remain in Turkey, which continues to see new money invested, while earlier in the year when South African rates were below 10%, there was evidence of demand shifting from the rand market into Icelandic Eurobonds."
Seissinger agrees that Iceland holds very different opportunities from other Nordic markets. "There is definitely a difference between the investor bases involved that shape the bonds we issue there," he says. "In Norway demand mainly comes from institutional investors, while in Iceland it is retail. As a result our Icelandic bonds have been in maturities up to three years, with one 10 year bond. In Norway the bonds have been longer dated, going up to more than 20 years."
US accounts move in
Baars supplies a reason why Icelandic króna issuance may have expanded: "Investor demand hasnt changed significantly in Norway and Sweden this year. However, in Iceland it has increased, with US investors becoming more interested."
A flurry of króna deals in July may have been prompted by the impending redemption in September of the currencys biggest Eurobond, a Ikr60bn deal from KfW.
But there are also profound differences between the Norwegian and Swedish markets. "They are different mainly because the Norwegian economy relies on oil, while the Swedish is reliant on industry," says Christopher Flensborg, co-ordinator in capital markets at SEB in Stockholm. "The Swedish bond market is more liquid and the structure is changing quite fast."
All three markets are developing rapidly, and are likely to keep changing fast, as investors appetites respond to market conditions. But there are other factors shaping the future of these markets.
Flensborg says more corporate issuers are appearing: "In the past their funding requirements have been limited and they havent needed to visit the bond market. Now that has begun to change because the global shift towards M&A has meant increased balance sheets. If that trend continues globally I can foresee more corporate issuance."
Another issue that might worry investors in Nordic currencies is the uncertainty that has gripped other global markets since the collapse of the US subprime mortgage industry. But market participants do not believe these markets will feel the pinch.
"I dont see the subprime issue having any effect on these markets at all," says Baars.
"If interest rates are moving up globally that could make an impact, but we havent seen that so far. With a flight to quality it could even turn into a positive for an issuer like Rabobank."