Nordic Capital Markets Forum Nordic bond markets – an update Thomas Begley, Managing Director, Co-Head of DCM Nordea Markets | Investment Banking | Fixed Income

8 October 2014

Markets – Investment Banking

NORDIC BOND MARKETS – AN UPDATE

Credit market update Corporate bond supply Credit overview

Cumulative EUR corporate Investment Grade supply 2014 weekly supply (rhs) 2012 2009

2014 2011 2008

2013 2010 2007

 European Investment Grade (IG) volumes reached EUR 178bn last week. Volumes are above 2010, 2012 and 2013 levels but significantly behind the record year of 2009 when the financial crisis motivated massive issuance.

325

 European High Yield (HY) issues reached EUR 55bn last week. This is an all time high level

225

14

200

12

300

Reduced M&A activity

-

Lower CAPEX

-

Strong corporate cash balances

130127

120

98

109 83

83 89

69

USD SSA

39 0

EUR eqv. (Billion)

EUR FIG SNR

EUR Covered

EUR HY

Nordic benchmark supply

30

17 8

8

EUR FIG SUB 2009

25 18

17

18

17

14 15 10

2007

9

7 6

40

5 30

4

9

2 10 1

8

5 0,0 0,4

2,2 2,3

0,0

1,8

-

2,8 0,0

W1

0 USD SSA

EUR FIG SNR

3

2014 12 12

9

EUR IG

2008

20

2013

20

5 EUR SSA

2009

10

2012

28

6

2010

8

0

11

2013

2011

84 28 25

10

2014

2012

50

1

35

EURbn

EURbn

60

20014 weekly supply (rhs)

2014 108

50 EUR IG

W7 W10 W13 W16 W19 W22 W25 W28 W31 W34 W37 W40 W43 W46 W49 W52

EUR Covered

EURbn

179 127

12 13

W4

70

EURbn

EUR eqv. (Billion)

152157

18

2

Cumulative EUR corporate High Yield weekly supply

2013

100

15

4

2012

150

20

6

75

2009

245

EUR SSA

8

100

W1

211

200

125

50

Global benchmark supply

197

10

150

-

288 214

175

25

350

250

16

250

YTD Global and Nordic Euro-market benchmark supply by segment 300

18

275

 Looking at global EUR volumes it is evident that most bond segments are at their highest levels since 2009. For instance, both European and Nordic EUR HY volumes are at record levels. This is however not the case for Nordic EUR IG which is on a downwards trend ever since 2009 primarily because of: -

20

EUR HY

W4

W7 W10 W13 W16 W19 W22 W25 W28 W31 W34 W37 W40 W43 W46 W49 W52

EUR FIG SUB Sources: Dealogic

Page 1

Oslo Stock Exchange, 8 October 2014

NORDIC BOND MARKETS – AN UPDATE

Nordic Credit market update Trends since the financial crisis Nordic volumes – Loans vs. bonds

Trends since the financial crisis

120

 The Nordic market is gradually shifting towards a more U.S. style capital market model where bonds account for a greater share of total financing

100

 An increasing number of Nordic corporates have diversified their funding base by accessing the fixed income markets in addition to traditional bank financing

80 EURbn

 In 2013, for instance, there were more than 50 inaugural issuers in the Swedish market  Bond spreads peaked during March 2009 and October 2011. Ever since May 2012 spreads have fallen until mid-2014 where bond markets have experienced increased volatility

60 40 20

 However, banks are now also considered “wide open” to new business with a continued downward pressure on margins

0

 Nordic bank competition in the loan market is once again extremely fierce

2002

iTraxx indicies (Credit Default Swap curves for European IG and HY credits) bps Main (rhs)

Crossover (rhs)

bps

250

bps 75 73

1120

Main (rhs) Crossover (rhs)

2003

2004

2005

2006 2007 2008 Loans Bonds

2009

2010

2011

2012

2013

Recent bank loan market margin development (Western Europe and Nordics)

bps 300

bps

350

290

300

280

250

BB loan margin

BBB loan margin

A loan margin

AA loan margin

71

200

920 69 67

150

720 65

270

200

260 150

63

100 520

250

61

100 240

50

320

59 57

0

120 55

230 220

50 0

Sources: Nordea and Bloomberg

Page 2

Oslo Stock Exchange, 8 October 2014

NORDIC BOND MARKETS – AN UPDATE

Norwegian corporate bond market cumulative issuance YTD issuance amounts to NOK 80.6bn compared to NOK 74.6bn for the same period last year Credit overview

Total corporate bond weekly supply NOKbn equiv.

 Issuance in the Norwegian market has seen increasing activity the last few years and emphasizes its growing nature. Last year, a record NOK ~100bn was issued by corporates

100 90 80

 So far this year, NOK 80.6bn has been raised by corporates in the Norwegian bond market

70

 HY issuance represents most of YTD total issued volume, at NOK 55.6bn (69% of 2014YTD volume)

50

60

40

 In the IG space, only NOK 25.0bn has been issued so far this year

30

 European and Norwegian IG issuers started this year well funded. Combined with low M&A activity and aggressive banks this has resulted in low IG bond volumes in 2014. M&A activity have now picked up pace and combined with favorable IG spreads we believes that issuance volumes will pick up again.

20 10 0 1

Investment Grade weekly supply

NOKbn equiv. 100

2008 2009 2010 2011 2012 2013 2014ytd

90 80 70 60

4

7

10

13

16

19

22

25

28

31

34

37

40

43

16

19

22

25

28

31

34

37

40

43

46

49

52

High Yield weekly supply

NOKbn equiv. 100

2008 2009 2010 2011 2012 2013 2014ytd

2008 2009 2010 2011 2012 2013 2014ytd

90 80 70 60 56%

50

50

40

40

30

30

20

20 44%

10

10 Note: estimates

0 1

4

7

10

13

16

19

22

25

28

31

34

37

40

43

46

49

52

0 1

4

7

10

13

46

49

52

Sources: Nordea

Page 3

Oslo Stock Exchange, 8 October 2014

NORDIC BOND MARKETS – AN UPDATE

Norwegian corporate bond market Composition Credit overview

Yearly corporate issuance by rating NOKbn 100

 In the last two years, issuance has been composed of fairly even IG/HY

AA

A

BBB

BB

B

CCC

90

 So far this year, HY issuance has been substantially higher than that of IG as HY accounts for 69% of YTD volume. This is partly due to increased HY issuance, and lower activity from real estate and utility issuers which typically account for a large part of IG issuance

80 70 60

 Traditionally, the B segment has accounted for the largest share of HY issuance. So far this year, the B rated segment represents the largest share of issuance volume at 76% of HY volumes or 52% of all corporate bonds

50 40 30

 The total corporate bond debt outstanding in the Norwegian bond market amounts to approximately NOK 356bn equivalent.

20 10

 Roughly 56% of total outstanding corporate bond debt in the Norwegian market is represented by HY credits, a fast-growing credit segment. That said, IG volumes have more than tripled since 2000, from NOK 50bn to NOK 157bn.

0

Outstanding corporate bond debt per year ended

2014ytd corporate issuance by rating and by industry

NOKbn equiv. IG

HY CCC AA 4% 2%

400

A 6%

Supply 4% Industrials 5%

350 300

BBB 24 %

250 56%

TMT 3%

Aquacultu re 2%

Oil Service 17 %

Oil & Gas 6%

Real Estate 8%

200

Utility 17 %

150 B 52 %

100

Shipping 10 %

44% 50 Note: Nordea estimates

-

BB 12 % F&S 14 %

Drilling 14 %

Sources: Nordea and Dealogic

Page 4

Oslo Stock Exchange, 8 October 2014

NORDIC BOND MARKETS – AN UPDATE

Composition of the EUR High Yield market Private equity backed bonds large proportion of the EUR market European High Yield bond volume

European High Yield bond volume by ratings

EURbn 80

100 % 90 %

70

80 % 60

70 %

50

60 %

40

50 %

30

40 % 30 %

20

20 % 10

10 %

0

0% 2006

2007

2008

2009 2010 2011 Sponsored Not Sponsored

2012

2013

2014 H1

2006

2007

2008 B

2009 2010 2011 BB BBB CCC/CC NR

Volume compositions

Characteristics of the segments

 Since 2009 has PE sponsored companies represented ~ 30-40 % of the European HY volume.

 BB segment:

Around 40%

− B segment:

Around 45%

− CCC:

Around 5%

− Crossover/NR:

Around 10%

2013

2014

− Predominantly Not Sponsored corporates (83% of volum since 2006) including fallen angels

 Ratings split in European HY issuance − BB segment:

2012

− Cross-over style credits and Cross-over style documentation  B segment − Since 2006 the split between Sponsored and Not Sponsored corporates have been 50/50. 2014 YTD Sponsored deal represents ~60% of single B issues − Strategic decision to accept higher financial risk due to leverage nature to be offset by lower operational risk and tighter documentation. Capital structure typically driven by optimizing cost of capital − Standard HY documentation Sources: Dealogic

Page 5

Oslo Stock Exchange, 8 October 2014

NORDIC BOND MARKETS – AN UPDATE

Liquidity in the Nordic High Yield market improving Combination of increased cross Nordic interest and international participation

 Non-Nordic accounts are generally currency agnostic and take part inn all Nordic currencies and EUR. However wil normally have increased interest for larger transaction −

Exception is USD where marketing is predominantly to UK and US hedge funds and other QIBs

SEK

 Other Nordic accounts are equally keen on both SEK and NOK but Fins in particular will have increased interest for EUR (STL example, Finnish name)

EUR

 Swedish investors on average have capacity for up to NOK 1.0 bn (ex: NADL) and are active in both SEK and NOK but also in EUR (in particular if rated).

USD

 Norwegian investors are predominantly active in NOK and USD, but not very active in EUR nor SEK. Estimated stand alone capacity of NOK 1.0 billion

NOK

Deals arranged by Nordea Markets Deal size

Tenor

Demand split on typical NOK Sr. Unsecured transactions

1,680m

6y

2,235m

5y

1,000m

5y

1,500m

5y

1,900m

7y

1,000m

7y

1,500m

5y 6m

1,500m

5y

1,300m

6y

1,000m

5y

120m

5y

3%

130m

5y

5%

100m

5y

230m

5y

20%

125m

5y

19%

30%

49%

34%

4%

32%

7%

54%

18%

26%

37%

28%

3% 6%

44%

18%

47%

36%

34%

13%

32%

7%

16%

62%

23%

80%

5%

0%

66%

6%

10%

58%

34%

37%

4% 3%

NO Accounts

5%

30%

17%

1%

8%

41%

63%

15%

7% 9%

21%

77%

17%

4%

18%

8%

13%

10%

48%

80% SE Accounts

Other Nordic

International

Source: Nordea

Page 6

Oslo Stock Exchange, 8 October 2014

NORDIC BOND MARKETS – AN UPDATE

Investor “groups” in EUR High Yield Investors for a Nordic name UK High Yield Funds – 40 / 60%

Nordic High Yield Investors – 20% / 30%  Strong interest for Nordic names

 Specialized HY investors and the largest single investor group in all EUR HY

 Fund managers, pension funds, insurance companies and Private Banks

 High interest to Nordic names and an increasing interest towards Nordic CCYs

 Name recognition important  Investor appetite proven by Nordic book sizes in recent Nordic bond deals:

 Preference for having a Nordic specialist as a discussion partner and secondary market liquidity provider

 Lindorff > 500m€  Ovako

> 250m€

 Polygon > 250m€  Paroc

> 200m€

 Metsä Board > 1.0bn€

Continental European High Yield investors – 10 / 25%  German, French and Benelux fund managers specialised HY portfolios  Strong appetite for Nordic assets  Preference for having a Nordic discussion partners

Page 7

Oslo Stock Exchange, 8 October 2014

NORDIC BOND MARKETS – AN UPDATE

Loans vs. Bonds – Fundamentals From the issuers’ point of view

Early repayment

Amortization / Maturity

Bonds

Loans

Normally contains call protection during the first 2-4 years (for a 7 year bond) with 30-60 days notice period. Floating Rate Notes (FRNs) are usually with shorter non-call period.

Sponsors are free to repay debt with 10 days notice at par. Up-front fee payments provide lenders with some call protection.

Bank structures are more flexible with respect to repayment

None, partial calls allowed during the life of the notes (typically 10% of nominal at 103% annually). Ability to raise longer dated maturities (depends on market cycle for banks)

Normally 30-50% of drawn debt (term loans) are amortized over the life of the facilities. Nordic market generally not providing additional tenor

Banks normally require deleveraging through amortizations. Attractiveness to sponsors is dependent on alternative use of capital. Bonds are a good alternative in cases with longer than average projected holding period.

Subject to Fixed Charge Coverage test or Leverage test

Very limited, business plans are normally fully financed (capex facilities are included from the outset)

In the medium to long term bond structures tend to be more flexible whereas bank structures allow for more sizable acquisitions in the early phase of a transaction. In cases with no scheduled amortization allows sponsors to use generated cash more efficiently than to amortize bank debt. Bonds can be a source to tap an additional set of investors, which often complement banks and other loan investors.

Subject to sufficient financial health and subject to the build-up basket linked to accumulated net income

Subject to being in compliance with Restricted Payment mechanics (normally including a leverage test)

Normally build-up baskets allow for dividend payment earlier than fall away provisions in bank structures. Normally “fall aways” are set so that sponsors are allowed to pay dividend after 4-5 years

No maintenance covenants with ability to spend generated cash on capex

Normally Interest Cover, Net Debt to EBITDA, Debt Service Cover and Restriction on Capex

A structure without maintenance covenants does not restrict CAPEX spending

Ability to incur additional debt

Ability to pay dividend

Covenants

Page 8

Comments

Oslo Stock Exchange, 8 October 2014

NORDIC BOND MARKETS – AN UPDATE

Comparison of Local / Nordic HY issues vs. International transaction Norwegian (NOK)

SEK

EUR (Nordics)

EUR (International)

Amount range

~ 300mNOK – 2.5bnNOK (With Int’l style up to 3bnNOK)

~ 250mSEK – 2.0bnSEK (With Int’l style up to 4.0bnSEK)

~ 30 – 200m€

~175m€ - ~1.0bn€ (can also include local ccy tranches)

Maturity

5y typically (longer maturities available)

5y (6 - 7y tested with PE cases)

5y (potential for 7y)

5y – 10y (typically 7y)

Coupon

FRN in most cases

FRN or FRN/Fixed dual-tranche

Fixed

Fixed (~80%) FRN (~20%)

Listing

Oslo

Stockholm

Helsinki / Stockholm / Copenhagen / Oslo

Luxembourg MTF / Dublin

Docs

Standardized loan document and disclosure

Nordic HY template

Nordic HY template

Very standardized (RegS / 144A)

Rating

Shadow ratings always provided

Shadow rating usually used

Shadow ratings can be used

Typically from two agencies

Covenants

Maintenance / Incurrence (first unrated deal with incurrence covenants arranged by Nordea in 2013)

Incurrence

Incurrence

Incurrence

Trustee

Nordic Trustee

Corp Nordic / Nordic Trustee

Corp Nordic / Nordic Trustee

Yes

Governing law

Norwegian

Swedish

Finnish / Swedish / Danish / Norwegian

New York

Investor base

Up to around 100 Norwegian and Nordic (International to some extent)

Up to around 150 Swedish and Nordic (International if larger transaction)

Up to around 200 Nordic + some Int’l

>200 International investors Nordic investor base growing

Page 9

Oslo Stock Exchange, 8 October 2014

NORDIC BOND MARKETS – AN UPDATE

Comparison of Local / Nordic HY issues vs. International transaction Norwegian (NOK) Norsk Gjenvinning

EUR (Nordics) LM Wind

EUR (International) Lindorff Build up basket: 50% of CNI from first quarter prior to Issue Date plus other customary builders

Restricted payments

Pro-rata basis in intra group distributions, 1) Prior 18 months if i) leverage