Investors across Europe have lapped up the opportunity to buy the credits of leading industry players from the Nordic countries, adding new names to their growing corporate debt portfolios.
And issuers have been keen to diversify their investor bases and reduce their reliance on the bank lending markets. Neil Day reports.
Any fears that Nordic borrowers might be left on the sidelines after the introduction of the euro have quickly been quashed. Despite only one of the countries, Finland, joining the single currency, a host of issuers from across the region have accessed the euro market.
Credits from Denmark, Finland, Norway, Sweden, and even Iceland, have all launched euro denominated issues this year. Such enthusiasm for the new currency - sometimes in contrast to the attitudes of the region's governments - has led to promising opportunities for issuers and investors, encouraged by underwriters which have trumpeted the virtues of the new market.
Nordic borrowers made an impact on the euro sector before the official introduction of the new currency, through euro-fungible transactions in legacy currencies and issuance in the single currency.
Headlining the euro related projects were Finland and Sweden with innovative euro denominated domestic government bonds, while other Euromarket veterans were also coming to terms with the changing market.
But the arrival of Nordic corporates in the euro arena has been among the most exciting developments of 1999.
"This is the busiest year I've seen in terms of Scandinavian corporates getting ratings, setting up MTN programmes or launching transactions," says Ron Ross, director and head of corporate debt capital markets for Scandinavia at Merrill Lynch.
Increasing competition for funds and rising margins in the loan market have led many corporates to look to diversify their investor base and prompted them to reassess their funding strategies. But more than any other borrower group, corporates have been able to profit from the euro market's paradigm: a credit market.
"Combined with the fact that bank lending spreads have come under increasing pressure since the last quarter of 1998," says Ross, "the main reason for the arrival of Nordic corporates in the euro is the opening up of a fully fledged credit market in Europe."
He adds: "There is so much more effort going into thorough credit analysis that triple-B issuers are now much more acceptable to the market. Previously only household names like Volvo and Electrolux or higher rated credits such as Statoil, Telenor and Vatenfall could have done deals."
Justin May, head of Nordic origination at ABN Amro, agrees. "The Eurobond market was previously a market dominated by higher rated credits," says May. "At the beginning of the year many people were concerned about just how deep the market was going to be for lower rated credits.
"But we have seen that the pace of change and the momentum behind the credit market is very high. There has been, particularly in the Nordic region, significantly more issuance by lower rated credits."
Issuance in 1999 by Nordic corporates and utilities in euros or legacy currencies has leapt from six issues totalling Eu883m in 1998 to 18 totalling Eu3.869bn, according to CapitalData Bondware.
The attention that the euro has attracted this year, and difficult dollar markets, have increased the desire of Nordic corporates to tap the market.
"The market is only in its infancy," says Merrill's Ross, "but we have presented borrowers with a choice of dollars or euros, alongside other currencies such as sterling and yen, and the most attractive opportunities for issues this year have been in euros."
Ross's colleague Gustaf Nyblaeus, a director on the Scandinavian corporate debt capital markets desk at Merrill Lynch, adds: "The euro market has definitely attracted a lot of attention away from the Eurodollar market. If you look at Eurodollars, the Swiss are the only big buyers in Europe. Investors in euroland are focusing on euros, partly as they are rebalancing their portfolios."
Improving arbitrage has added to the momentum. "The basis swap from dollars at the beginning of the year was more favourable for issuers swapping into, for example, Stibor, but the swap has turned," says Santhi Athreya, vice president, Nordic capital markets at Salomon Smith Barney. "The pricing borrowers can get in euros is now better."
A Eu400m transaction for Norwegian oil company Statoil demonstrated the attractions of the new currency, and also showed how investors which had long remained focused on their domestic markets have begun looking at a wider range of credits.
Before the introduction of the euro, Aa2/AA rated Statoil had only launched one public deal in a euro legacy currency. Like other euro debutants, Statoil was keen to tap into the new investor base.
"We have launched some private placements in Emu currencies," said Jon Jacobsen, Statoil's group finance director at the time of the deal's lauch in June, "but we have primarily been active in Swiss francs, sterling and dollars.
"The size and liquidity of the new euro market are attractions that make it a good time for us to launch our first euro issue. We also believe that the market is positive towards names like Statoil."
Launched by ABN Amro and Salomon Smith Barney, Statoil's 12 year transaction, priced at 50bp over OATs, was of particular interest to French and Dutch investors which are regular buyers of long dated paper.
"The best example in the changing behaviour of investors is the French," says Salomon's Athreya. "Previously they were purely domestic players with a big domestic market and they had little need to diversify outside francs. But they have already become one of the most active participants in the wider euro market."
The unification of diverse investor bases under a common currency means that lead managers are now able to offer corporates a wide range of options that are only available because of the differing tastes of investors across Europe.
The difference in distribution between the Statoil issue and one for Baa2/BBB rated Finnish paper and forest products producer Metsa-Serla, a Eu200m seven year transaction launched by Salomon last December, highlights the variety of opportunities available to borrowers.
"The investor base for these deals depends on several factors," says Salomon's Athreya. "Whereas the French bought Statoil as they are major buyers of long dated paper, Italian investors were the biggest takers of Metsa-Serla as they were among the first to move into higher yielding bonds."
As many are newcomers to the market, Nordic corporates are credits that European investors are eager to add to their portfolios. "Scandinavian corporates have wide appeal because most of them have very little history of issuing in the European markets and therefore there is also an element of scarcity value," says Merrill's Ross.
The wide range of credits from the region to tap the euro sector - from domestically oriented utilities such as Vatenfall to companies with a more international outlook, such as Ericsson - reflects the breadth of the growing market.
"It is interesting to note that in several sectors, such as banking and utilities, it is the domestic focus and domestic strength of the issuers that creates appeal for European investors," says Joe Dryer, global head of debt capital markets at Paribas.
"In contrast, it is the international market leadership and competitiveness that creates the appeal in other sectors such as telecoms and paper."
While a split in strategies may be expected between the Finnish, who are part of Emu, and those remaining outside the euro, no major difference has yet emerged.
Finnish borrowers clearly have a natural need for euros, but as other companies from the Nordic region diversify not only their investor base, but also their operations, into euroland, an increasing number are keeping all or part of the proceeds of euro transactions unswapped.
"The Swedes, for example, don't have the same natural currency requirement for euros as the Finnish," says Merrill's Nyblaeus, "but many Swedish corporates are so international, with a large portion of their sales and assets in Europe, that they don't necessarily swap everything back into Swedish krona.
"So even when you look at Nordic issuance this year, you don't see a particular predominance of Finnish issuers."
One example of this trend is Statoil. "Statoil kept its funds in euros and will use part of it for its European operations," says Salomon's Athreya. "We will see more and more international players doing the same."
And when Swedish paper company AssiDomän launched its debut euro transaction, a Eu200m seven year issue led by Merrill Lynch in early June, the company kept some of the proceeds unswapped.
"Euros is a natural currency for us to choose as we have businesses and assets in euroland and we will be keeping some of the proceeds of our euro issue unswapped," says AssiDomän's senior vice president and group treasurer Johan Lagercrantz.
The speed with which Nordic corporates have taken advantage of the new opportunities offered by the euro market has come as little surprise to bankers familiar with the region.
"People look at the Nordic region as a very sophisticated area where issuers are innovative and at the forefront of developments," says ABN Amro's May. "The whole region is quite dynamic."
However, the arrival of Nordic corporates in the euro market has not only been prompted by its advantages, but also by changes in the loan market that they had relied on in the past.
"Corporate borrowers have been swamped by the commercial banking community in the past," says Merrill's Ross. "Certainly in the last three years the biggest competition for us has not so much come from other bond houses, but from the local bank market."
Dryer at Paribas agrees. "The loan market in the Nordic region was always one of the most competitive, generating tight spreads for the borrowers," he says.
But he adds that the loan market still remains highly competitive. "Whilst the consolidation within the banking industry has had some uplift on margins," says Dryer, "they nevertheless remain below those in the rest of Europe."
Given Nordic borrowers' traditional ability to achieve some of the keenest terms in the syndicated loan market, it was perhaps unsurprising that the upward pressure on margins would take longer to filter through in financings for the region, and that it would take longer for Nordic corporates to move to the bond markets.
In 1998, while borrowers across the future euroland were facing increasing costs when refinancing outstanding facilities, margins in the Nordic region were rising - but more slowly than in euroland and more slowly than bankers had been expecting at the beginning of the year.
This year the upward trend has accelerated. Higher margins have been one of the reasons why the volume of loans for the region fell from around $12bn in each of the first and second halves of 1998 to $9.8bn in the first half of 1999.
A prime example of this pressure was a syndicated loan for Svenska Cellulosa Aktiebolaget (SCA), a forest products and packaging producer typical of the region. The corporate's previous deal, a DM2.5bn seven year revolver, carried a margin of 17.5bp for the first five years, rising to 20bp for years six and seven.
When Deutsche and Svenska Handelsbanken arranged the company's latest financing early this year, a Eu700m seven year revolver, the company had to pay 32.5bp for the first five years, rising to 35bp. And the company's desire for a long dated loan indicated SCA's belief that margins could rise still further.
"Single-A corporates are looking at paying a margin of 35bp," says one regional loan market banker. "By the end of 1999 they ought to be paying around 50bp."
Complementary to higher margins, a diversification of their investor base has been a further factor pushing Nordic corporates into the arms of bond underwriters.
"Loan portfolios are already full of Nordic forestry credits," commented one loan market official at the time of SCA's financing, "and many banks are still holding SCA paper from previous deals in 1995 and 1996."
The combination of higher margins and limited funding sources were behind AssiDomän's decision to set up an Eu1bn MTN programme arranged by Merrill Lynch. The company launched its debut bond issue at the beginning of June.
"One of the main reasons for establishing the programme and tapping the euro bond market was to diversify our investor base," says AssiDomän's Lagercrantz.
"Up until a couple of years ago we had been dependent on the bank market," says Lagercrantz. "But what we have seen in the past two years is rising margins in the loan market. We would not be able to achieve the margin we got 2-1/2 years ago if we were to refinance our outstanding facility today."
The company also has an international CP programme and had already established a domestic MTN programme. However, the euro market offers AssiDomän a breadth and depth that the Swedish market could not provide.
"The Swedish bond market is much more limited than the euro market," says Lagercrantz. "We could do two to five years off our MTN programme, but longer deals were difficult."
As Nordic corporates have moved from domestic to more international funding sources, a new approach to banking relationships has developed.
As in other European areas, many companies have chosen to build on their relationships with lending banks when they have entered the bond market. But AssiDomän, along with an increasing number of other corporates, moved away from its traditional circle when awarding the mandate for its MTN programme.
"Merrill Lynch wasn't one of our lending banks and it faced fierce competition from other banks who had lent to us in the past," says Lagercrantz. "But I was very much for trying to get the best bank for the purpose and we felt that Merrill was the right choice."
One area where bond mandates will remain strongly tied to lending relationships is in the field of bridge financing.
The past year has seen a surge in M&A activity that has included many players in the Nordic region. Alongside consolidation in the banking industry, many Nordic corporates have engaged in domestic or cross-border mergers or takeovers and the competition to win roles in these financings has been high.
Danish food products and packaging company Danisco's acquisition of its Finnish rival Cultor produced one of the keenest financings for a Nordic corporate this year. Its Eu1bn 364 day bridge facility, arranged by Deutsche, was one of the biggest ever loans from the Nordic region to be underwritten by a single bank.
Priced at 20bp over Libor, the loan was initially condemned as far too tight, even given the high quality of the borrower and its rarity in the market. However, the deal was 35% oversubscribed.
The rationale behind Deutsche's willingness to underwrite such a large transaction is clearly the additional business the bank will hope to gain from its commitment to Danisco. Bankers expect the corporate to tap the bond markets later this year and it will surprise nobody if Deutsche is in pole
Michael Dicks, head of debt capital markets at SEB, believes that acquisition transactions will continue to be influenced by the traditional low pricing environment in the region.
"Acquisition driven transactions for Nordic blue chip companies will not offer very high yields," says Dicks. "They will be priced more like traditional plain vanilla financings."
The ancillary business available to lending banks is clearly at the forefront of banks' minds when they mull the pros and cons involved in participating in syndicated loans.
"The reality is that everybody, no matter what their line of business, is focused on RoE and shareholder value," says ABN Amro's May. "Utilising your balance sheet without any ancillary business or reciprocity is not going to result in an attractive RoE for your shareholders.
"Meanwhile corporates are recognising those banks which show commitment to them through other mediums - whether it be equities, bank facilities, cash management or project finance - and rewarding them with their capital markets business."
Both May at ABN Amro and Salomon's Athreya acknowledge the importance of their loan market commitment to the region as a factor in their league table positions.
However, as AssiDomän's decision to mandate Merrill Lynch for its MTN programme illustrates, traditional lending relationships cannot be relied on when competition is high. Indeed one of Salomon's most significant lead management positions was for a borrower with which the bank had only had a minor lending relationship.
In December 1998, Salomon launched Metsa-Serla's debut euro issue: the first euro denominated transaction for a Nordic corporate, and the first 'pure' euro deal - its payment date was in January 1999 - for any corporate.
The transaction heralded the arrival of Nordic companies in the euro sector and also illustrated that the holy grail that bond underwriters had been suggesting the euro would offer - attractive funding and investor diversification away from the loan market - was perhaps a reality.
"Metsa-Serla had a long history of raising money through the bank markets," says Salomon's Athreya, "but when they approached the euro market they needed size that was not feasible through a purely domestic
"What the deal demonstrated was that although they had to pay up over the bank market, they got a size that would otherwise not have been possible, and investor diversification."
According to Athreya, the deal initially caused a stir among Nordic companies who were dismayed at a deal they saw as setting an expensive benchmark for the region. But Athreya argues that although they failed to see the broader picture at first, they are now seeing the opportunities available in the euro market.
"If you look at borrowers which had previously gone to the Yankee market for long dated funding, they paid a significant pick-up over where they would trade in the Euromarket," says Athreya.
"Now you can see a change in their attitude. Borrowers who had previously paid a premium to tap the Yankee market are now setting up MTN programmes with a view to tapping the euro market."
One example is UPM-Kymmene, which hopes to launch its debut euro bond near the end of September. The Finnish pulp and paper group is setting up a Eu1bn MTN with Salomon as arranger. Like several Nordic corporates, UPM's last visit to the capital markets was to the Yankee market, with a $600m two tranche issue of 10 and 30 year debt in November 1997.
Alongside Danisco and UPM, several other corporates are joining the queue of borrowers set to launch euro debuts.
Although their governments may view the euro with differing degrees of enthusiasm, Nordic corporates are likely to continue in their eagerness to establish their euro credentials. n