Market Continues To Be Supported By Continued Risk Appetite

Headlines

Supportive start to the year for credit.

2014 credit strategy: ‘A recovery to carry us’.

Nordea gets approval for IRB model in the Nordic region by the four Nordic FSAs.

Market commentary
The first couple of weeks of 2014 have been supportive for credit and the market continues to be supported by a high level of liquidity and continued risk appetite. The beginning of 2014 has also been influenced by substantial issuance activity. So far, in the Norwegian high-yield market (as of 17 January) we have seen issuance of more than 10% of the total issuance in 2013. The largest high-yield bond in history based on Norwegian documentation was issued last week, as the issuer Oro Negro Drilling (not rated) issued a senior unsecured bond of USD725m with a five-year tenor.

On 14 January, we published our ‘Credit Outlook 2014: A recovery to carry us’. We believe that after seven years of famine, a more sustainable, albeit frail, recovery is coming. With recovering fundamentals, stabilising issuance volumes and monetary authorities supportive, we predict slightly tighter credit spreads in 2014. We believe BBB is the place to be in non-financial investment grade, while BB is our preferred category of non-financial high yield credit risk. We prefer non-financials to financials for valuation reasons and the greater downside risk skew for banks. Four names that have the potential to perform in 2014 in our base case scenario are G4S, Seadrill, SKF and the new Dong Energy hybrids. Please refer to our 2014 Credit Outlook for more information.

On Wednesday, Nordea revealed that it had got approval for using the advanced internal ratings-based model (IRB) for its corporate exposures in the Nordic region by the four Nordic FSAs. This approval will lift Nordea’s core equity tier 1 ratio (CET1) by 0.7% based on the Q3 13 figures. Furthermore, Nordea stated that it had also got approval for using foundation IRB for its corporate exposures in Russia in December, resulting in approximately a 0.2% increase in CET1 as per Q3 13. The two approvals confirmed the previously stated pro forma Q3 13 CET1, according to Basel II, at 15-16%. Following the approvals, Nordea’s average risk weight on corporate exposures is reduced from 52% in 2012 to an estimated 46%, which is on par with the average for the largest six Nordic banks on pro forma 2012 figures.

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