Once frozen out from the international capital markets, Scandinavian corporates are these days more free to venture beyond their home region for funding. No longer able to rely on local reputation, the Nordic companies are learning to court investors and rating agencies to bring truly international deals. What these deals lack in size they make up for in quality, and, as Philip Moore discovers, both domestic and bulge bracket banks are jostling for the business.
Whatever the future holds for Scandinavian corporate issuance, the region will be remembered for creating one major landmark. When Metsä-Serla of Finland began to roadshow its triple-B rated Eu200m issue via Schroder Salomon Smith Barney (SSSB) in December 1998, it was setting out on the first corporate issue ever to be denominated in the new single European currency.
There was little else that was especially memorable about the deal, but it sent out a very clear message from the northernmost tip of Euroland. This message was that many Scandinavian borrowers, almost from day one, were determined to integrate themselves fully within the new euro denominated capital market. In this respect, Metsä-Serla (now called M-real) accomplished its main objective, with only about 30% of the issue ultimately placed with Finnish investors.
For Scandinavian companies, there have been three major influences that have prompted a drastic change in borrowing strategies over recent years. The launch of the euro has clearly been one of these, even if it has had a more direct and immediate impact on companies in Finland, a full participant in the euro from the outset, than on those in Sweden and Denmark, which have not signed up to membership, and Norway, which remains outside the EU.
A second important influence is that Scandinavian corporates today find themselves operating within a very different capital market from the one that governed their funding strategies a decade or so ago. Then, corporate issuers could scarcely get a look-in to a market that was overshadowed by the borrowings of public sector issuers, including the regional sovereigns and government agencies such as Swedish Export Credit (SEK). Domestically, meanwhile, the Swedish and Danish markets in particular were drowned in mortgage backed bonds. As far as corporates were concerned, the Scandinavia of the 1980s and early 1990s was the embodiment of bond market crowding out.
Small wonder that against this background Nordic corporate borrowers rooting out opportunities in the international capital markets did so on a highly opportunistic, cost-sensitive basis that did little to enhance their reputation as investor-friendly issuers. It was this sort of approach to the market that led some commentators to invent unkind catchphrases about the borrowing policy of Scandinavian issuers. When one headline appeared with the words "nothing sucks like an Electrolux", it was not referring to the superior suction powers of the Swedish company's products. It had more to do with its attitude towards basis points. Like bread crumbs confronted by a powerful vacuum cleaner, few, if any, of these were ever left on the table for investors.
At the Electrolux headquarters in Stockholm, deputy group treasurer Gösta Bonde concedes that isolated pockets within the investor community still recall some of the less well-received Electrolux transactions of the past. But he is adamant that the borrower has changed its spots, which is why it preceded last November's Eu300m deal - reduced from an originally planned Eu500m - with an extensive four day roadshow, and responded to depressed sentiment in the market by pricing the transaction sensibly. A deal that began life with price talk in the region of 75bp over swaps was eventually priced at 80bp over. "We weren't desperate for funding at the time, but we decided to show ourselves in the market and establish our name among investors," says Bonde.
That approach probably helped when Electrolux returned to the market this year with a deal always aimed at raising Eu300m, which Bonde says was much more satisfactorily placed than last year's deal. In the first, a substantial amount of the issue found its way into Scandinavian accounts, which rather defeated the object of the issue.
The impact of consolidation
A third important influence on the borrowing strategies of Scandinavian corporate issuers has been industrial consolidation, the impact of which has been two-fold. On the one hand, bank consolidation in the Nordic region, aimed at cutting costs and delivering improved returns for shareholders, has vastly reduced the number of local banks active in the Scandinavian loan market. In turn, this has led to more expensive pricing of bank facilities, with the leading local players no longer willing or able to fund the corporate sector at ludicrous, sub-economic rates. As equity analysts at Morgan Stanley Dean Witter pointed out in an industry analysis published in December: "Corporate lending is being written at more profitable terms than before, when banks were chasing volume at the expense of margins in 1998-1999."
The result has been that, like it or not, the corporate sector throughout Scandinavia is being pushed with increasing frequency away from bank loans and towards the capital market for its funding. It has also meant that the line-up of Scandinavian borrowers appearing in the capital market is very different in character to the crowd that regularly appeared in the 1980s and early 1990s.
"There has been a huge change in the borrowers we are seeing coming to the market," says Justin May, managing director of origination and head of European corporates at ABN Amro - one of the international banks focusing on the potential of the Scandinavian corporate sector. "The client base that we cover now in the Nordic region is very different to what it was even three years ago. In the mid-1990s, borrowers such as the Kingdom of Sweden had very significant funding needs and were regular issuers in the public international capital markets, as were issuers such as SEK. Today, SEK does a large percentage of its funding in the Japanese private placements market and the kingdom doesn't borrow at all in the international capital markets. In their place, we are seeing a wave of corporate borrowers coming to the market, and many of these are top quality international names."
The other by-product of industrial consolidation in the Nordic region, away from the banking sector, is that the process has established new companies, or reincarnations of older ones, that are often hungry for expansion-related capital. Indeed, two of the borrowers most often nominated by bankers as leading the region's charm offensive towards international investors are both relatively new creations in their current form, even though one of them claims to be the oldest company in the world.
The company is Stora Enso, which is the product of a merger in 1998 between Stora Kopparbergs Bergslag Aktiebolag of Sweden - which dates back to 1288 - and Enso Oy of Finland. With the acquisition of Consolidated Papers of the US in 2000, Stora Enso became the world's second largest company in terms of paper and board capacity, with worldwide sales of Eu13bn, although its growth phase is unlikely to have come to an end with last year's acquisition. "Stora Enso aims to be the leading forest products company in the world," notes a report published last year by Dresdner Kleinwort Benson. "The company's management is determined to retain its industry leadership position, which will probably mean substantial merger-driven expansion."
While the same report comments that Stora Enso "aims to finance growth primarily through cashflow and proceeds of asset sales," it is also clear that the group's management is more advanced than most in terms of recognising the importance of the international capital markets as an invaluable funding source. Hence its extremely successful debut euro denominated transaction in June 2000 via BNP Paribas and Goldman Sachs. The original Stora Enso plan had been to launch a benchmark transaction raising a minimum of Eu500m, but a book worth some Eu1.4bn allowed the Baa1/BBB+ borrower to issue an Eu850m seven year transaction, priced at 137bp over Bunds, or a spread of 90bp over Euribor.
Stora Enso's textbook debut
The way in which Stora approached the international capital market was a textbook case of how to cultivate an entirely new investor base. According to Markus Rauramo, head of funding at Stora Financial Services in Brussels, the year before the launch of the deal had been dedicated to meeting investors, with the help of the two eventual leads as well as Dresdner Kleinwort Benson, SEB and WestLB, in order to spread the Stora Enso credit story. "Our target was to get access to about 50 of the first tier institutional investors in Europe and to talk to them without discussing any deal specifics," says Rauramo. "That gave us a pretty good idea of the areas in which we could place our bonds, and at the end of the day the deal was placed with about 120 institutions that were broadly distributed internationally." Specifically, the borrower had always intended to place a maximum of 20% of the issue with investors in its dual home markets of Sweden and Finland, and the balance was very well spread, with 16% going to France, 11% to the UK, 10% to Italy and Spain, and 9% each to Asia and Germany.
With a book worth Eu1.4bn, Stora Enso could presumably have pushed a little harder and brought the size of the deal up to the magic Eu1bn threshold that many investors consider the minimum size for a genuinely liquid benchmark. If there was a temptation to do so, Rauramo resisted it. "The market was very shaky at the time that we announced the deal," he says, "but we were confident that the work we had done with investors would mean that they understood that the turbulence in the market at the time did not really affect us as a credit. We looked at the book very carefully and decided to draw the line at Eu850m, which we thought was the right size to make absolutely sure that there would continue to be strong demand in the secondary market."
The Stora Enso story did not begin and end with last June's deal. Talk to almost any investment banker on Nordic syndicate or origination desks, and the consensus is that few issuers from the region have done more than Stora to establish and maintain a relationship with investors. "Stora Enso has a very in-depth investor relations programme managed by the treasury team itself, and it is very committed to non-deal roadshows and updates," says Santhi Athreya, vice president of SSSB's Nordic debt capital markets desk in London.
It is not difficult to see why Stora Enso should be so keen on keeping the lines of communication with its investors wide open. "The whole basis for our borrowing policy is that when Stora and Enso merged in 1998, the company reformulated its strategy and adopted a very acquisitive position," says Rauramo. "Because we wanted to grow in line with - or even faster than - the consolidation within the industry, we knew that we were going to be financing a balance sheet that in six or seven years' time might be twice as big as it was at the end of 1998."
The latest step in Stora Enso's financing programme only reaffirmed the company's ability to impress investors. Its $750m 10 year global - the largest dollar global from a Scandinavian corporate - was around 10 times oversubscribed when it was launched at 200bp over Treasuries in mid-May via Goldman Sachs and SSSB.
Birka Energi impresses
Another strikingly successful Scandinavian entrant to the euro market in recent years is also a new company in its current form. Swedish utility Birka Energi had two outstanding euro denominated deals (Eu500m and Eu250m) when it tried to launch a three year FRN at the end of 2000, but postponed the issue because of adverse market conditions. By early February, with demand for triple-B corporate issuance resurgent among European investors, it pulled off a Eu500m seven year transaction via ABN Amro and SSSB that was viewed as a critical pathfinder in terms of investors' appetite for lesser rated credits. According to Eirik Winter, head of corporate debt markets at SSSB in London, investors testified to their demand for credits in the triple-B bracket, with the total order book on the Birka deal amounting to about Eu1.6bn.
Generating that sort of demand required painstakingly educating investors about the Birka credit, says the company's Stockholm-based chief financial officer, Lars-Håkan Ellenius. "Even though the company was the result of a merger between two of the largest and oldest utilities in Sweden, it was only formed in September 1998," he says, "which makes it relatively young." The original financing to support the company's growth, Ellenius adds, was obtained principally via the bank loan market, with two-thirds of the funding accounted for by a bridge financing that needed to be repaid within two years. It was therefore clear at a fairly early stage that the optimum way to refinance the loan would be via the bond market.
It was equally obvious, says Ellenius, that the amounts Birka would be looking to raise - and the maturities it would be looking to fund in - would have been much too large for the domestic market to accommodate. In recognition of this, Birka moved quickly to secure what Ellenius describes as the necessary "driver's licence" for entry into the international market: ratings from Moody's and Standard & Poor's. The company also began presenting its credit to investors.
Most corporates like to make a big song and dance about their arrival in the international capital markets, but Birka did so almost literally when kicking off its roadshow in the most original manner. Early one morning at the Salomon Smith Barney London head office, before market open, Birka treated those in attendance to a visual extravaganza to the strains of Queen's We Will Rock You.
For the more faint-hearted, Birka's investor relations programme also involved meeting 40 or 50 of the largest investors in Europe, says Ellenius, partly to reassure them that unlike some names in the credit market, Birka will aim to avoid delivering any unpleasant surprises and will stick to the pledges it has given its new investor base. One of these pledges, which was an important part of the marketing accompanying the February transaction, was the promise that the Eu500m deal will be Birka's only excursion to the international public bond market this year.
That does not mean that Ellenius' department will spend the remainder of 2001 twiddling its thumbs. Ellenius points out that an important element of Birka's funding policy has been securing the full mandate of the company's board to move very quickly in the private placements market through its EuroMTN programme as and when opportunities arise.
Swedish bond market evolving
For a company such as Birka, raising funding in the international market might be a shade more expensive than it is in the domestic market, but to Ellenius, that is beside the point. "In the initial stages it might be 10bp or so more expensive to raise funds in the international market," he says. "But the board and I see the extra cost almost as an insurance premium." The modest premium, he adds, is a tiny price to pay in exchange for the certainty that the international market will be open to a borrower such as Birka, which is not always the case in the domestic market.
Other Swedish borrowers also express doubts about the capacity of the domestic market to service their borrowing requirements. Vattenfall, the region's largest utility, has faced this problem for several years. "Five or six years ago, when we had a rating that was equal to or even better than a number of the mortgage bond issuers, we were almost always told by domestic investors that we had to pay a liquidity premium of anything between five and 15bp," explains Vattenfall Treasury's Stockholm-based treasurer, Robert Hellstadius. "We started to borrow in 1992 when we were transformed into a limited liability company, and we had the option of tapping the domestic market or the Eurobond market, and as we were not prepared to pay the premium we chose to sidestep the Swedish market. I think we were pioneers in setting up a EuroMTN programme back in 1994, and although we also established a Swedish MTN programme, issuing in the Swedish domestic market has been much more difficult.
"In my view," he adds, "there has never really been a corporate bond market in Sweden. Although you could always tap the market, it was never a liquid market and it was only one that was open when investors wanted it to be." As a result, Hellstadius says, the domestic market for corporates acted almost entirely on a reverse enquiry basis, with local investors calling the shots in terms of issuance schedules and maturities. That was obviously a poor environment in which to manage any sort of long term borrowing strategy, especially for an acquisitive borrower such as Vattenfall with extensive funding requirements.
That environment may now be changing, with the demarcation line between the domestic Swedish krona sector and the international market becoming increasingly hard to identify. "The distinction between the domestic and international market is becoming more and more blurred," says Jonas Lind, global head of origination at Nordea in Stockholm. "Increasingly, we are seeing deals coming out in the domestic market and with domestic documentation that are being placed internationally. For example, in February we led a transaction for Sydkraft that was technically a domestic bond but 95% of which was sold outside Sweden. But we are also seeing domestic issues with Eurobond style documentation from borrowers such as Stora Enso, which are settled via Euroclear or Clearstream, so I'm not sure how meaningful it is to distinguish between the domestic and international markets."
The Stora Enso deals referred to by Lind were two new "Swedish krona benchmark" bonds originally launched last November. The bonds in the form of a Skr1.5bn three year issue and a Skr4bn six year offering, which the company said represented "the first time that an industrial company [had issued] benchmark loans in Swedish kronor". In March this year, it added Skr500m to the 2003 issue and Skr2bn to the 2006 bond, saying that: "The objective is to generate a liquid market and greater interest in corporate bonds denominated in Swedish kronor and to offer a liquid alternative to liquid government and mortgage bonds."
It is no coincidence that this local issuance is confined to maturities of five years and below. "There is a local market in Sweden that can provide efficient funding in small volumes, especially at the shorter end of the yield curve," says Ulf Stejmar, head of credit sales at Nordea in Stockholm. "Up to three years, the domestic market is very competitive, especially on the CP side. We are seeing a lot of the exporters setting up domestic CP as well as Euro CP programmes, and the domestic market is generally cheaper and more liquid for them."
The Nordic domestic bid
Clearly, the strength of the domestic bid for corporate names varies considerably from country to country in the Scandinavian region, depending chiefly on the extent to which the economy in question has embraced the euro. "Traditionally, Nordic borrowers were able to raise funding at much cheaper levels in the domestic market than they were internationally," says Winter at SSSB. "They did not need ratings and they were able to borrow at as much as 30bp through the international market. That sort of arbitrage opportunity disappeared very quickly in Finland because its membership of the euro meant that the domestic investor base could buy comparable credits outside Finland with more liquidity and at a wider spread. In Sweden the domestic bid is stronger, but the arbitrage opportunities there have almost gone as well. I would say the domestic bid is strongest in Norway, which is least involved in the euro. There, corporates are still getting pricing of 20bp or 30bp through euros in the domestic market."
For the time being, however, supply is continuing to be piped into the euro denominated market by Scandinavian borrowers. In March, for example, Securitas stepped into the footprint left earlier in the year by Birka when it launched a Eu500m seven year transaction via SEB and SSSB, which once again successfully tapped investors' appetite for the extra yield available from triple-B issuers going beyond five years. As with the Birka transaction, Securitas found that the world had changed appreciably since its excursion into the international markets at the end of the previous year. Then, the company had hoped to raise Eu500m in a seven year deal, but had been forced to pare the offering down to a Eu350m five year bond. By March, sentiment towards triple-B issuers had changed to the extent that a very broadly diversified base of institutions came into the transaction, which was priced at 110bp over swaps.
Also in March, Ericsson made a welcome return to the market with a Eu350m two year deal via ABN Amro, which was increased from an originally planned Eu300m and was distributed broadly across Europe. While Ericsson had outstanding paper in the market, the scope of Scandinavian names available to credit investors was broadened in May, when Sweden's car safety technology group, Autoliv, launched a debut Eu300m issue via SEB and SG following a six day roadshow.
In terms of size, all these transactions were comfortably eclipsed in May, when Ericsson returned to the market with the largest corporate issue ever launched in the new European currency by a Scandinavian corporate borrower. Led by ABN Amro and SSSB, this was a dual tranche transaction raising Eu2bn of five year funding and £250m of seven year funding - the euro tranche having been increased from a planned Eu1.25bn.
Although Swedish corporates have accounted for the bulk of recent issuance out of the Nordic bloc, telecoms deals from Finland and Denmark this year have also been noteworthy transactions - not least because neither came with coupon step-up clauses, something of a rarity in the sector these days.
The first of the two, in January, was a Eu300m five year deal for Finnish telecoms company Elisa, which is the second largest in the country behind market leader Sonera. Rated A3/A- with a stable outlook, and with no plans to dabble in UMTS licences or global expansion, Elisa was seen as a rare example of stability within the volatile European telecoms sector. With pricing at 187bp over Bunds, the issue, led by JP Morgan, found healthy support among investors in Scandinavia, as well as with accounts in Germany and elsewhere in continental Europe.
The other key telecoms issue to emerge from Scandinavia this year was an altogether bigger affair: the Eu1bn five year transaction from the A2/A rated Tele Danmark in April, via Goldman Sachs and UBS Warburg, which was increased by a further Eu350m in May. As with the Elisa deal, this came with no step-up language, and at the company's Copenhagen headquarters treasurer Thomas Gelting says that he was delighted with investors' response to the deal. "From our standpoint, we wanted to raise a minimum of Eu1bn, and we also wanted to differentiate ourselves from other issuers in the sector. One of the ways to do that was not to have covenants in the deal," he says, adding that on the roadshow the company was presented with "surprisingly few" questions regarding covenants.
"One or two investors asked for covenants and some may have decided not to buy the paper because there was no step-up language," says Gelting - but he adds that this had no meaningful impact on the distribution of the issue. "We were very pleased with the transaction and I guess the best indication of its success was that banks from outside the selling consortium all agreed that it was a successful deal," he says. In part, Tele Danmark would have been helped in its April deal by the relative scarcity of the name in an otherwise overcrowded market, and by the fact that the company has no intention of returning to the market in the foreseeable future. "The bond will be a collector's item," says Gelting.
Elsewhere in the region, Norway continues to be the quietest of the four countries in terms of issuance, with Norsk Hydro having last appeared in the market in October 1999 (with an Eu300m deal), and Statoil absent since June of the same year (when it raised Eu400m). Bankers are hopeful, though, that Norway's borrowers will become more active in the euro market. "If you look at the Statoils and the Norsk Hydros, they haven't really needed the funding given the strength in the oil price," says Ann Iveson, head of European corporate coverage at BNP Paribas in London. "Also, in the past the dollar market has tended to be more suitable for Norwegian borrowers with respect to currency, size and cost, but most of those competitive advantages have disappeared over the last year. The euro market might not be there yet in terms of 30 year maturities, but we are now much more credible in terms of size and cost, so I think we will see more Norwegian issuers coming to the market over the next six to 12 months."
Bright future for Nordic issuance
Bankers are optimistic that the Nordic region will continue to see a healthy level of supply as Scandinavian companies wean themselves off traditional sources of bank lending and develop a broader investor base across Europe and further afield. They also express admiration for the way most borrowers in the region have abandoned the opportunism they showed in the past and have embraced, with varying degrees of energy and enthusiasm, the concept of bondholder relations, both on a pre- and a post-deal basis.
Stora Enso is perhaps most frequently referred to in this respect, although dedicated bondholder relations is not the exclusive preserve of companies in Sweden or Finland. At ABN Amro in London, May points to an infrequent borrower such as Norway's Statoil as an example of a company that is very proactive in presenting itself to investors outside the Nordic region. "Scandinavian companies as a whole have been very sophisticated in terms of internationalising their treasury operations," says May, "and part of that sophistication has been a recognition that they can't just be beholden to equity investors and analysts. They also recognise that they need to liaise regularly with their bondholders."
Aside from working hard on the bondholder relations side of the business, bankers say that Scandinavian issuers are now very comfortable with using US-type techniques in the primary market. "Go back two or three years and you would have syndicates of 20 banks in Nordic corporate deals," says Gustaf Nyblaeus, head of Nordic issuance at Goldman Sachs in London. "You're now seeing deals being structured much more like in the US market, which usually means having one or two bookrunners, a small group of co-managers and much more transparency in the pricing and allocation process through the use of the pot system."
"Our Eu850m deal was almost 100% pot, and it is a mechanism I would recommend to everybody," says Rauramo at Stora Enso. "From an issuer's point of view, it means that instead of having two sales forces competing with each other, you have one big sales force acting as a team."
Bankers say that there are two indicators of the potential for increased public issuance in the capital market among Scandinavian corporates. The first of these is the quantity of companies that have recently been setting up inaugural EuroMTN programmes, and the second is the number of those that are still unrated, but which are known to be having discussions with the ratings agencies with a view to making their bonds more acceptable to international investors.
One such company is the Finnish manufacturer of elevators and escalators, Kone, which in May set up a debut Eu1bn EuroMTN programme via joint arrangers SSSB and Nordea, which were joined as dealers by ABN Amro, BNP Paribas, Okobank and SEB.
At Kone's Helsinki headquarters, group treasurer Helga Lavonen-Ronkainen says that the chief objective of the EuroMTN programme is to extend the maturities of the company's borrowings. "We have been using the ECP market for about 15 years already, so that has been a daily function of our treasury," she says. "We are not rated, so I don't expect big demand for longer dated issuance, but I would guess that three to five years would be do-able in the Nordic markets." The absence of a rating suggests that the main target for this sort of issuance would be regional rather than international investors. "We have been discussing a rating with the agencies, but we have not yet made a decision because the volumes of our funding requirements are not that big," says Lavonen-Ronkainen.
Another Nordic company that has recently established a new MTN programme, but which has gone further than Kone and announced its debut issue, is Scandinavian Airlines System (SAS). In mid-May the company, rated A3 by Moody's, awarded Morgan Stanley and Schroder Salomon Smith Barney the mandate for a euro transaction, justifying bankers' hopes that MTN signings will lead to additional supply.
In terms of ratings, Scandinavian issuers are moving towards more openness to internationally accepted practices. At Standard & Poor's in Stockholm, analyst Angelo Morano is convinced that the coming months will see many more ratings for Nordic companies, although for the time being he sees Scandinavia as divided into two distinct groups: Sweden, and the rest. "The perception, understanding and acceptance of ratings is quite high among Swedish companies," he says. "Unfortunately, we haven't seen that many new ratings this year, but the pipeline is quite full and hopefully before the summer, or at the latest by the third quarter this year, there will be quite a few more ratings coming out."
Morano says that he thinks the next wave in terms of demand for ratings will come from Finland and, to a lesser extent, from Norway - although Denmark should be one of the most fertile sources of potential new ratings within the region. To date, Denmark has been a barren field in the ratings landscape of Europe, with only one company - Tele Danmark - having an internationally recognised rating. Clearly, if more Danish companies are to step beyond the domestic market or the regional CP market, they will need to open themselves up to ratings agencies.
Of those Scandinavian companies that have had long standing ratings and are well known to the international investor community, one obvious candidate likely to return to the market later this year is the utility, Vattenfall, which is the Nordic region's largest generator and distributor of electricity. It is also one of Europe's more aggressive companies in terms of making acquisitions outside its home market, and has targeted Germany and Poland as its main growth areas beyond Scandinavia. Although Vattenfall is 100% state owned, it is its acquisitive bent that has fuelled a deterioration in its credit quality over the last 18 months. In February 2000, Moody's reduced Vattenfall's ratings, advising that the downgrades reflected: "the expectation of increased financial risk and business risk as a result of Vattenfall's strategy to become a major energy company in northern Europe, including two major investments in Germany and Poland in recent months. Further investments in these countries and the northern European market at large are probable."
In line with the ratings agencies' prognosis, Vattenfall was put on review for downgrade and CreditWatch negative in December 2000, following the news that the Hamburg utility HEW (in which Vattenfall has a 71% stake) was to acquire an 81.25% stake in Veag and a 95% holding in Laubag for DM2.9bn, in addition to DM5bn of assumed Veag debt. More recently, Vattenfall (via HEW and US utility group Mirant) took joint control of the Berlin-based utility Bewag.
In total, Vattenfall's expansionary ambitions are so far estimated to have cost the company Skr40bn (close to $4bn), which has exerted considerable pressure on its balance sheet and given rise to another complication as far as the outlook for its credit quality is concerned. This is that the Swedish government might ultimately look to wash its hands of its ownership of Vattenfall via an IPO, a possibility flagged up by Moody's last year: "Moody's believes that privatisation is a possibility within the next few years in line with the general trend towards privatisation in Sweden and within Europe; therefore state support is not factored into the rating level."
It is the uncertainty over the ratings outlook for Vattenfall that explains why the utility has been relatively quiet in terms of its capital market activity in recent months, following something of a blitz on the euro market in 2000, when it launched four issues in March, May, July and September. These raised close to Eu2bn across a wide spectrum of maturities, with the last of the quartet - a Eu500m deal led in September via SSSB and SG - plugging into the seven year point in the curve. In total, Vattenfall raised Skr23bn in 29 public and private transactions in 2000.
Vattenfall's treasurer Robert Hellstadius confirms that the company will return to the market in due course, but not until it has a very clear message to deliver to existing and prospective bondholders with regard to its rating. "When everything has fallen into place regarding our expansion in Germany, we will have a ratings presentation that will allow us to go back to the market with a confirmed rating," he says. "And before launching another bond we will do a very extensive roadshow in Europe. Since we were put on negative review in December there have been substantial changes in the group structure and we know that we need to clarify these changes to our investors."
Further issuance later this year will allow Vattenfall to diversify its investor base even further, although Hellstadius says that he is happy with the broad distribution of the company's bonds across Europe to date. Spanish investors, for example, have shown a particularly strong appetite this year for shorter dated bonds issued off Vattenfall's MTN programme, which is surprising given that the company has organised no dedicated roadshows, to date, in Spain. Hellstadius says that Vattenfall would also like to cultivate a more expansive following among US investors, which explains why the company is weighing up the potential for a 144A SEC exemption, probably in the fourth quarter of this year.
While a return to the market from Vattenfall would represent a familiar enough credit for euro-based investors, bankers believe that a feature of the Scandinavian corporate market in the second half of this year and in 2002 will be the emergence in the market of several new borrowers, or of issuers that have been so elusive that their current outstanding issues barely see the light of day. One such borrower that would supply immense scarcity value, for example, would be Nokia, which has one tiny bond outstanding in Finnish markka.
"Nokia hasn't needed to go to the market because its balance sheet is so strong, and because it can still raise funding in the loans market at incredibly competitive levels," says Michael Dicks, head of debt capital markets at SEB in London. "But a number of other companies in the region aren't in such a strong position and will have to go to the capital market because the banks can't take any more of their paper. There's a clear limit to how much relationship capital banks can tie up with any individual company, and increased participation in the loans market becomes a law of diminishing returns. The more loans banks put on their books, the lower their returns become because the ancillary business they can generate does not necessarily rise. That means that sooner or later banks will either have to price their loans much more realistically, or stop lending altogether and persuade borrowers to go to the bond market instead."
One potential problem for many Scandinavian borrowers in a bond market where issues of Eu5bn or more are increasingly common, is that their overall funding requirements remain modest compared, for instance, with the huge facilities being raised in euros by telecoms companies, auto manufacturers and utilities. A striking characteristic of the bond issues launched since the end of 1998 by Scandinavian borrowers is that so few of them have reached the Eu1bn marker of liquidity.
Indeed, of 37 public euro denominated deals (excluding short dated facilities) launched by Scandinavian corporates between Metsä-Serla's curtain raiser in December 1998 and the middle of April 2001, only three were for Eu1bn, and these came, predictably enough, from the telecoms and auto sectors. Volvo raised Eu1bn in September 1999, since when Sonera and Tele Danmark have also each raised the same amount, in March 2000 and April 2001 respectively, Tele Danmark incresaing its deal by Eu350m soon afterwards. Only in May was the envelope at last pushed out further, when Ericsson launched the Eu2bn tranche of its jumbo offering.
Nevertheless, of those 37 transactions, well over half (23) have been for amounts of less than Eu500m, meaning that many of the Scandinavian corporate bonds launched since the start of Emu would have failed to qualify for inclusion in a number of the key credit indices that are increasingly used by fixed income investors in Europe.
Bankers arranging deals for Scandinavian borrowers say they are relaxed about this, and believe that as they come to the market more regularly in the future there will be plenty of opportunities for the region's corporates to launch new bonds in sizeable chunks. "I think those companies with an annual turnover of between Skr30bn and Skr60bn will have a need to come to the market, and although those needs might not be in multiples of Eu1bn, they will certainly be in multiples of Eu500m or more," says Dicks at SEB.
Others point out that what many Scandinavian borrowers lack in terms of liquidity, they make up for by offering a degree of industrial diversification that investors are crying out for in a market so dominated by issuers from the telecoms and auto sectors. "The trend that we saw at the start of the year, when everybody was focusing only on the big liquid deals, has slowed down a little," says Anders Arozin, head of debt securities at SEB Merchant Banking.
"I think investors are looking with more interest now at the smaller deals of Eu300m or so because that is a good way to create a broadly diversified portfolio." Over and above this, say Arozin and others, the Scandinavian region offers investors access to industries that other geographical areas in Europe are unable to offer - notably, to the forestry sector.
At Handelsbanken Trading in Stockholm, head of origination, syndication and corporate bond trading Peter Serlachius adds that it is not just diversification benefits that Nordic credits offer, but also their quality that should appeal to international investors. "Back in the early 1990s the financial profile of many Nordic companies looked pretty horrible," he says, "with many of the forestry companies, for example, having very strained balance sheets. Today, those balance sheets generally look stronger than the industry average. Take the example of Stora Enso and UPM Kymmene, which are both BBB+."
International banks active
The steady flow of issuance from Nordic borrowers over the coming months will, presumably, continue to provide a robust supply of transactions for the international banks that have dedicated considerable resources to establishing and cultivating relationships with corporate borrowers in the region. In this respect, none can claim to have been more active than SSSB, which has exploited several advantages to emerge as a prolific lead manager of Scandinavian corporate issues.
One of these advantages, inevitably, is the Citibank balance sheet and the long established lending relationships forged by the bank throughout the region that stretch back decades. Another, which even the bank's competitors say should not be underestimated, has been the pulling power within the region of SSSB's head of corporate bonds, the Swedish-speaking Finn, Eirik Winter. Winter's own response to this is a self-effacing one. "Perhaps my personal contacts helped when I first joined Salomon in 1996," he says, "but our success in the region has been built up on the basis of teamwork, technique, research and distribution, not on personalities."
Establishing a proven track record virtually from day one also helped. "Because Metsä-Serla was the first corporate issuer in the euro-denominated market, and was entering into very untested waters at the time, I think that transaction helped our franchise among Nordic borrowers and also helped us to trigger some other issuance in the region," says Winter.
Alongside SSSB, the other banks that have not been afraid to use their balance sheets to win primary market business include Deutsche Bank - described by one competitor as being "super-aggressive" in the Nordic region - and ABN Amro. The Dutch bank has had an important foothold in Scandinavia from a corporate finance perspective since its acquisition of Alfred Berg - although London-based head of European corporate origination May says that this is not the principal reason for its success in the primary corporate market in the region. "Excluding Alfred Berg, we employ more than 300 people in Scandinavia, so we have made a big commitment to the region," he says.
Of the other international banks to have targeted the Nordic region, Goldman Sachs has emerged as one of the clear leaders. "The highlights for us have been deals such as Stora Enso, Electrolux and Tele Danmark, and I am very excited about the potential because there are clearly more deals to come," says Nyblaeus at Goldman Sachs in London.
Nyblaeus believes that the dollar market in particular is a promising area for Nordic issuers. "I think we'll see a lot more Nordic borrowers looking at the dollar market as a complement to their euro funding, either because many of them have extensive asset and revenue bases in the US, or because they need to increase their financial flexibility," he says. "Today, there is only one Nordic corporate with an SEC registered debt shelf in place, which is Norsk Hydro, and I am sure that number is going to increase."
Of the other international banks, Morgan Stanley has been surprisingly quiet in the Nordic region, while BNP Paribas has not yet built upon the success it enjoyed as a lead manager of last year's Stora Enso transaction, although its London-based head of corporate coverage, Ann Iveson, believes that will change. "By number, if not by volume, I think Scandinavian issuers will represent a significant share of the euro bond market," she says. She adds that the recent recruitment of Resa Lundkvist - who has spent the last 16 or so years talking to Scandinavian companies both at JP Morgan and Standard & Poor's on the ratings advisory side - will be another valuable string to the BNP Paribas bow as it cultivates relationships with would-be new borrowers from the region.
Nordic banks fight their corner
Aside from attracting the international investment and universal banks, Scandinavia's capital market is also obviously critical for the leading Nordic banks, which have no intention of allowing all the plum business in their backyard to be monopolised by the likes of ABN Amro, Deutsche, Goldman Sachs and SSSB. Following the consolidation in the Nordic banking sector in recent years, regional commentators say that there are now probably only three Scandinavian banks that can seriously compete in the capital markets SEB, Nordea (which has brought together the old Merita, Nordbanken, Christiania Bank, Tryg-Baltica and Unibank), and Svenska Handelsbanken.
All three insist that they are well placed not just to originate and distribute bonds within the Nordic region, but also to place Scandinavian corporate bonds throughout Europe, as well as to market paper from non-Scandinavian issuers among Nordic investors. Unsurprisingly, their international competitors - as well as one or two Scandinavian issuers - are quick to pour cold water on the local banks' broader distribution capabilities. "Clearly the local banks have a lot of political power in terms of their corporate relationships," says one international banker, "and as it has become progressively more difficult for them to make money in the domestic capital market they have turned to promoting their credentials in the credit market internationally.
"Good luck to them, but I think they are in an unenviable position because they simply don't have the distribution capabilities internationally. I'm not saying they are unable to sell a few bonds to German Landesbanks. But the question is how much added value do they bring to the placement of a deal, and the answer is not a lot."
The Nordic banks themselves reject the notion that they are limited to a regional backwater beyond which they are unable to distribute paper. "We see ourselves as the only choice among the regional banks when it comes to bringing Nordic borrowers to the market," says Dicks at SEB. "The amount we have invested in our research and our sales force is being rewarded in the mandates we are winning for borrowers such as Securitas and Autoliv, and there are plenty more to come. We are talking to a number of potential issuers at the moment, some of which will soon be getting ratings for the first time."
Dicks accepts that the competition provided by ABN Amro, Deutsche Bank and SSSB and others is formidable in the Nordic region, but that these players are accepting SEB as a strong and professional partner when it comes to joint bookrunning positions. He also says that investors as well as issuers appreciate SEB's niche credentials within the market. "The difference between us and the bulge bracket banks is that we concentrate exclusively on Nordic issuers," he says. "Issuers know that when we are leading a deal for them 100% of our focus will be on their transaction, and all the major investors in Europe are recognising this niche strength, rather than expecting us to be a broad-based bond house."
Dicks' colleague, Anders Arozin, is also confident that SEB will be an increasingly influential player as far as Scandinavian issuers in the euro market are concerned. "To be quite honest, I was a bit hesitant two years ago that any Nordic bank would be able to compete with the large international players in the Eurobond market," he says. "I'm certainly not hesitant today, because a very clear trend over the last year or so is that European investors are turning to us more and more for information about Nordic borrowers and industrial sectors. We have an edge there and that, together with our European and Nordic placing power, also gives us an edge with borrowers." That competitive edge, Arozin adds, extends beyond those Swedish borrowers with which SEB has had close relationships in the past. "We are also increasingly being appointed as dealers on EMTN programmes launched by Finnish and Norwegian companies," he says, "and we are convinced that is going to pay off in the future."
At Handelsbanken Trading's Stockholm headquarters, Serlachius is equally emphatic that Scandinavian banks will play an important role in the euro capital market. He argues that the continued fragmentation of the European market means that there will always be room at a senior syndicate level for locl banks, but that there is also evidence supporting the assertion that the Nordic players can place paper very effectively outside their home market. "To give you an example, in February we led a Eu750m lower tier two deal for our own bank," he says. "That is a fairly big clip for a subordinated issue and it sold very well, both within the Nordic region and across Europe, so even though that was a self-led deal, it is a good example of our placing power outside Scandinavia." The Handelsbanken transaction was jointly led by Goldman Sachs, and priced at 105bp over the 2006 Bobl, or 65bp over mid-swaps, and attracted total orders well over Eu1bn.
The third of the Nordic banks that is active in the international market also believes that it can compete effectively with the bulge bracket firms in the region. "Of course it is difficult to compete with the US houses and the resources they have," says Nordea's Lind. "But this bank has grown enormously in the last year or so and we are now capable of taking on some very big underwriting positions. We also have a big sales team in place on the credit side, with 15 or 16 people dedicated to the Nordic corporate sector and to distributing bonds both in Scandinavia and across Europe."
Lind adds, specifically, that the experience gained by, for example, the old Unibank in placing Danish mortgage bonds with non-Nordic investors has given the new Nordea very extensive contacts with institutions from well beyond the bank's Scandinavian backyard. He also says that these contacts, in markets such as France and Germany, helped Nordea to play an important role in distributing recent deals for borrowers such as Tele Danmark and Finland's Elisa.
Aside from helping to distribute Nordic corporate bonds internationally, local bankers say that they will also continue to play an important role in selling issues from multinational companies in Scandinavia. "International companies sometimes look for local funding for their operations in Sweden," says Lind at Nordea, "and we have generally seen that they are prepared to pay up for that funding because they have requirements in a specific currency and they obviously save on the basis swap."
At Handelsbanken Trading, Serlachius agrees that international issuance in the Swedish krona market will continue to be attractive for issuers and investors alike, pointing as an example to the popular reception given last year to the issues that raised a total of Skr3bn for GECC.
Such deals, says Serlachius, give local investors a pick-up over government and mortgage paper, as well as over privately placed domestic corporate issuance; while the FAS133 ruling will provide further impetus for US borrowers to raise funding locally, rather than to swap from dollars into local currencies. "Of course it's never going to be anything like the euro market in terms of its size, but I think we will see a fairly active market for krona denominated issuance from international companies with Eurobond-style documentation," says Serlachius. *
|Bookrunners of all euro denominated bonds for scandinavian corporates (Dec 1, 1998-May 22, 2001)|
|Lead manager||Amount||No of||Share|
|1||Schroder Salomon Smith Barney||6,273.33||22||24.42|
|9||Credit Suisse First Boston||830.96||9||3.23|
|10||SEB Merchant Banking||800.00||6||3.11|
|Source: Capital Data Bondware|