Investment Research Weekly Credit Update - Danske Bank · 2014-10-24 · 5 | 24 October 2014 e Weekly Credit Update Recently published research Metso Q3 14 - HOLD Metso delivered

Important disclosures and certifications are contained from page 11 of this report www.danskeresearch.com

Investment Research

Headlines

Calm has returned to the market

... thanks to the ECB and its potential corporate bond buying

Full transparency in the Swedish credit market

New edition of Scandi High-Yield Handbook

Market commentary

After the significant increase in volatility last week, this week has been a lot calmer. The

largest movement occurred on Tuesday when unconfirmed media reports of a possible

ECB corporate bond buying programme emerged (more on page 2). The Nordic high

yield market, which lost a significant amount of depth in the more volatile days, saw

some increased transaction activity as buyers came back to take advantage of depressed

price levels. As market sentiment improved, issuers also came back to the market.

Towards the end of this week, French chemicals company Arkema issued a PNC6 hybrid

of EUR700m at a yield of 4.95%. In the Nordics, Swedish cable company ComHem

(issuing entity Norcell Sweden Holding 3 AB) stole headlines with the senior secured

5NC2 issue of SEK2.5bn at ms+450bp.

Moving to the domestic Swedish credit market, the Swedish FSA on Tuesday announced

new transaction reporting rules for credit bonds, which previously had been exempt from

transaction reporting for liquidity reasons. Starting on 2 February, dealers trading bonds

listed on a Swedish exchange will have to report all trades at the latest the following day

at 9 am. Aggregated data per bond (lowest, mean and highest price and total transaction

volume) will be published. A 10-day reporting delay can be granted if a trade’s volume

exceeds SEK50m. This type of transaction reporting is very similar to what is already in

place in the Norwegian market.

This week we published the October edition of our semi-annual guide to Nordic high-

yield issuers – the Scandi High-Yield Handbook, 22 October. This time around, the

handbook includes profiles on 39 issuers from all four Nordic countries. Since the last

volume, DFDS has obtained an investment grade shadow rating and is therefore no longer

included as a high-yield issuer. Coverage on BWG Homes has been suspended in this

volume, following the acquisition by OBOS in June (a stronger unrated credit). We have

assigned a negative outlook for Farstad Shipping’s ‘BB’ corporate credit outlook (any

rating action limited to a one-notch downgrade) and downgraded our rating on

Stockmann from ‘BB-’ to ‘B+’. In addition, we have changed the outlook on our shadow

rating on Fred. Olsen Energy to negative. New names in this volume include Ahlstrom,

Beerenberg, Cermaq, Heimstaden, Hoist Finance, Golden Close, Norwegian Air

Shuttle, Nynas and St1.

Finally – don’t forget to book some reading time Sunday afternoon for ECB’s inaugural

evaluation and EBA’s stress test of European banks. A nice guide courtesy of ECB here.

24 October 2014

Analyst Gabriel Bergin +46 8 568 806 02 [email protected]

Contents

Market commentary 1

Selected charts 2

Recently published research 4

Official and shadow ratings 6

Weekly Credit Update

iTraxx Europe (investment grade)

Source: Bloomberg, Danske Bank Markets

iTraxx Crossover (high yield)

Source: Bloomberg, Danske Bank Markets

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Weekly Credit Update

ECB potentially buying corporate bonds

After the ECB announced and implemented a new covered bond purchase programme

and started work on ABS purchases, expectations are now rising that ECB will provide

even more buying interest in European credit markets. Thus, the (subsequently denied)

unconfirmed media reports that corporate bond purchases loom in the not-too-distant

future sent spreads tighter this week. In particular, investment grade (IG) credits are

benefitting, as it is highly unlikely that the ECB would start buying corporate bonds

outright with a rating lower than BBB-. Indeed, yesterday, iTraxx Main outperformed

iTraxx Crossover significantly.

So, why would the ECB do this? It is hardly rated IG corporates that have trouble

financing their investment plans. Rather, IG (and to some extent HY) issuers are issuing

bonds for M&A and shareholder remuneration purposes, so they should be quite able to

find creditors willing to finance actual capex. A hint can be found in an ECB working

paper from a while ago (hat tip: FT Alphaville/Nordea). In short, reduce Volkswagen’s

funding cost on the margin and it can finance its suppliers to a marginally higher extent.

The reasoning is befitting the ECB, being constantly worried about the transmission

mechanism.

If this happens though, how much is there to buy? A simple search for all outstanding

rated IG non-financial bonds yields a total outstanding amount of approximately

EUR930bn. Unfortunately, we see little effect on Nordic bonds from this, as the ECB

would most likely want to focus on buying euro-area corporate, leaving us with

EUR620bn. Assuming a purchase programme should only buy parts of the outstanding

amounts (let’s say 40%), we end up with a potential purchase amount just shy of

EUR300bn – still a fair amount (compare with some current EUR100m in SME ABS).

We do think this is quite a long way from the ECB’s current plans, though. First the new

programmes need to be implemented and evaluated and there are other assets to buy

before approaching the corporate market. However, do listen in on the next ECB press

conference (6 November) – it would not be the first surprise announcement from Draghi.

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Weekly Credit Update

Selected charts

iTraxx (Europe) vs CDX (US) Investment grade corporate yields

Source: Bloomberg, Danske Bank Markets Source: Bloomberg, Danske Bank Markets

Nordic corporates vs iTraxx Nordic banks 5Y CDS spreads

Source: Bloomberg, Danske Bank Markets Source: Bloomberg, Danske Bank Markets

Corporate BBB bond yield vs EuroSTOXX dividend yield 3M Libor OIS spreads

Source: Bloomberg, Danske Bank Markets Source: Bloomberg, Danske Bank Markets

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Weekly Credit Update

Financials spread vs non-financials (Industrials), A-rated

Source: Bloomberg, Danske Bank Markets

Europe fund flows Sweden fund flows Norway fund flows

Source: Macrobond Source: Macrobond Source: Macrobond

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Weekly Credit Update

Recently published research

Metso Q3 14 - HOLD

Metso delivered Q3 14 financial results that were somewhat below market expectations.

The results were held back by weaker sales in the Minerals division that were only

partially offset by the Services and Flow Control divisions, which both had another

quarter of strong growth. Debt metrics were flat despite positive FCF due to a slight fall

in LTM EBITDA but are fully commensurate with the current ratings. We continue to

like the story but we think the Buy case has played out, as Metso has closed the spread

gap to other 'BBB'-rated Nordic industrials in the heavy machinery sector. We downgrade

our recommendation from Buy to Hold.

Saab Q3 14

Saab released decent figures for the third quarter. Sales increased 9% y/y and operating

income was slightly down due to non-recurring items. Costs related to the campaign in

Switzerland negatively affected the quarter yet this was somewhat offset by the effects

seen from the efficiency programme. Operating cash flow was negative due to

investments in R&D in line with Q3 being a seasonally weak quarter. The deal with

Brazil regarding Gripen NG is progressing according to plan and expected to be signed in

the near future. Saab reiterated the outlook for FY 2014: sales in line with the 2013 level

and operating margin slightly better than 2013. We maintain our view of Saab as a

'BBB+' credit with stable outlook.

Jernhusen Q3 14

Jernhusen presented a good quarterly report for Q3. Rental and operating income

increased both sequentially and year-on-year with further cost reductions, not least thanks

to higher energy efficiency. The balance sheet remains quite strong and solidity improved

somewhat despite a fairly high current capex rate. This report supports our view of

Jernhusen as an 'A-' credit with stable outlook.

Stena switch idea - BUY

Stena 7.875% 2020 is attractive on a relative value basis. Fundamentally, we like Stena

and view the company as a BB credit with moderately improving credit metrics.

Therefore, we recommend increasing the duration on the name. Yield pick-up on the

Stena 2020 is some 1.4% pa versus the Stena 2019.

DNB Q3 14 - HOLD

DNB reported a very strong Q3 report that beat consensus on all lines and in particular

the low loan losses stood out. CET1 increased to 12.6% and the adjusted cost/income

ratio was as low as 44%, which speak of a bank with good control of its operation. We

like the bank but continue to believe the strong performance is already reflected in the

valuation. Hence, we maintain our Hold recommendation.

SEB Q3 14 - BUY

SEB's Q3 results were much in line with expectations despite somewhat higher loan

losses due to a single client in Denmark. We still like the bank and maintain our BUY

rating.

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Weekly Credit Update

Fortum Q3 14 - SELL

Fortum delivered a good Q3 14 report from a credit perspective. Revenues fell 8% y/y

impacted by weak power prices and heating demand. This was partly offset by stronger

hydro production and higher revenues from Russia. Group clean EBITDA fell 8% y/y

mainly due to lower heat earnings and distribution income. The latter was a result of the

divestments of the Finnish and Norwegian grids. Excluding this effect, Group clean

earnings rose y/y. Fortum's net debt fell 4% q/q due to lower capex leaving metrics

stronger q/q. Overall a credit neutral to slightly positive result from Fortum and we

maintain our SELL recommendation due to continued rating pressure and high

uncertainty about Russia.

Husqvarna Q3 14 - Outlook revised to positive, BBB- affirmed

Husqvarna continued to show a stable performance in Q3, with some sales growth and

improved margins. Leverage was further reduced during the quarter, partly helped by

positive working capital. Encouraged by Husqvarna's overall strong performance in 2014,

its delivery on its margin improvement programme, and its commitment to a strong

balance sheet, we now revise our credit outlook on the company from stable to positive.

We maintain our credit view of Husqvarna as a 'BBB-' company.

Stora Enso Q3 14 - HOLD

Stora Enso's Q3 14 results were slightly below market expectations. Sales were lower

than expected, declining 2% y/y, but Stora Enso still managed to increase earnings

significantly y/y due mainly to the group's cost-cutting programme and strong demand in

packaging and Biomaterials. Solid cash flow was offset by higher capex from Stora's

growth projects and credit metrics were roughly flat sequentially. In our view, Stora

Enso's rating should be safe in the near term and we maintain our HOLD

recommendation on the name, as we see decent carry in current spreads.

Investor AB Q3 14 - BUY

Investor reported a sequential increase in NAV of 6% to SEK246.8bn mainly driven by a

rise in the value of listed core investments. Leverage decreased marginally quarter on

quarter to 8.8% and remains within the targeted range of 5-10%. Adjusting for the recent

acquisition of 8% of the share capital in Wärtsilä and stock market turmoil, we estimate

the current leverage to be around 9.2%. We continue to consider the current valuation

attractive as the bonds are trading at a wide level relative to Investor's senior unsecured

ratings and Investor continues to build on its strong track record. We maintain our BUY

recommendation.

Nordea Q3 14 - SELL

Nordea reported good Q3 results with a further improvement in the asset quality but we

are concerned about the situation in Finland, which could result in increasing loan losses.

Nothing that should rock the boat but enough to justify a repeat of our SELL

recommendation given the tight spreads on Nordea's senior bonds.

Swedbank Q3 14 - BUY

Swedbank reported another solid result, with ROE of 16.6%, CET1 full Basel III of

20.7% and loan loss ratio of 7bp. We maintain our BUY recommendation.

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Weekly Credit Update

Atlas Copco Q3 14 - SELL

Atlas Copco presented a good set of Q3 14 results above market expectations in terms of

operating profit and roughly in line on sales. Boosted by the acquisition of Edwards,

revenues rose 15% y/y although growth was partially offset by low demand from the

mining sector. The operating margin was negatively affected by lower volumes and

dilution from M&A but aided somewhat by lower costs, higher prices and positive FX

effects. Cash flow from operations was a solid SEK4bn but net debt fell by less than

SEK1bn, mainly due to the acquisition of Henrob. Overall, tight valuation prompts us to

maintain our SELL recommendation on the name.

Electrolux Q3 14 - HOLD

Electrolux's Q3 14 operating income before restructuring charges increased 29% y/y to

SEK1.4bn due to solid margin improvement in Europe following a cost restructuring

programme and despite only 1.6% group organic growth year on year. Adjusted net debt

to EBITDA declined from 2.3x in Q3 13 to 2.0x in Q3 14. Following the acquisition of

GE Appliances, we expect S&P to downgrade Electrolux from 'BBB+' to 'BBB'. We

maintain our HOLD recommendation on Electrolux.

TVO Q3 14 - BUY

TVO's Q3 14 report contained no material news from a credit perspective. Underlying

performance remains solid and YTD nuclear capacity factors continue to be on the good

side of 92%. Power output increased in Q3 due to higher production on TVOs thermal

unit to cover temporary power deficits in Finland due to a dry Q3. TVO did not disclose

any news related to the Areva/Siemens arbitration or investment decisions regarding OL4.

We continue to see TVO being supported by its shareholders which includes contractual

support for its debt commitments in the long term. A downgrade from S&P is a risk

following the additional delay of OL3 and the weak power price situation in Finland.

However, we still see value in shorter TVO bonds trading wider than average 'BBB-'

rated EU utilities. We maintain our BUY recommendation preferring the 2019s.

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Weekly Credit Update

Ratings from Standard & Poor’s, Moody’s and Fitch and Danske Bank markets shadow ratings

Source: Standard & Poor’s, Moody’s, Fitch, Danske Bank Markets

Analyst(s)

Company Rating Outlook Sr. Unsec Rating Outlook Rating Outlook Rating OutlookAhlstrom Oyj B+ Stable Mads RosendalAkelius Residential Ab BB+ Pos BB Wiveca SwartingAmbu A/S BBB- Stable Jakob MagnussenAp Moeller - Maersk A/S BBB+ Stable Baa1 Stable Brian Børsting BUYArla Foods Amba BBB+ Stable Mads RosendalAtlas Copco Ab A Stable A2 Stable Mads Rosendal SELLAvinor As AA- Stable A1 Stable Åse Haagensen HOLDBank 1 Oslo Akershus As BBB+ Stable T. Hovard / L. HolmBank Norwegian As BBB Stable T. Hovard / L. HolmBeerenberg Holdco Ii As B+ Stable Øyvind MossigeBw Offshore BB+ Stable Øyvind MossigeCargotec Oyj BBB- Stable Mads RosendalCarlsberg Breweries A/S Baa2 Stable BBB Stable Brian Børsting SELLCermaq Asa BB Stable Knut-Ivar BakkenCitycon Oyj BBB Stable Baa2 Stable Åse HaagensenColor Group As BB- Stable B+ Åse HaagensenDanske Bank A/S A Neg Baa1 Pos A StableDfds A/S BB+ Stable Brian BørstingDlg Finance As BB- Stable Mads RosendalDna Ltd BBB- Stable Ola HeldalDnb Bank Asa A+ Stable A1 Neg T. Hovard / L. Holm HOLDDong Energy A/S BBB+ Stable Baa1 Stable BBB+ Stable Jakob Magnussen HOLDDsv A/S BBB Stable Brian BørstingEg Holding B Stable Jakob MagnussenEika Boligkreditt As A- Stable T. Hovard / L. HolmEika Gruppen As BBB Stable T. Hovard / L. HolmElectrolux Ab BBB Wr WD Brian Børsting HOLDElisa Oyj BBB Pos Baa2 Stable Ola Heldal BUYEntra Eiendom As A- Stable Åse HaagensenFarstad Shipping Asa BB Neg BB- Åse HaagensenFingrid Oyj A+ Stable A1 Stable A+ Stable Jakob Magnussen BUYFinnair Oyj BB Stable Brian BørstingFortum Oyj A- Neg A2 Neg A- Neg Jakob Magnussen SELLFortum Varme Holding Samagt Med Stockholms Stad Ab BBB+ Stable Jakob MagnussenFred Olsen Energy Asa BB+ Neg Sondre StormyrG4S Plc BBB- Stable Brian Børsting BUYGetinge Ab BB+ Neg Louis LandemanHeimstaden Ab BB Stable BB- Wiveca SwartingHemso Fastighets Ab BBB+ Stable Wiveca SwartingHoist Kredit Ab BB- Stable B+ Gabriel BerginHusqvarna Ab BBB- Pos Louis LandemanInvestor Ab AA- Stable A1 Stable Brian Børsting BUYIss A/S BBB- Stable Baa3 Stable Brian Børsting HOLDJ Lauritzen A/S B Stable B- Åse HaagensenJernhusen Ab A- Stable Gabriel BerginJyske Bank A/S A- Stable Baa1 Neg Thomas M. Hovard BUYKesko Oyj BBB Stable Mads RosendalKlaveness Ship Holding As BB- Stable B+ Bjørn Kristian RøedMeda Ab BB- Stable Louis LandemanMetsa Board Oyj B+ Pos B2 Pos Mads RosendalMetso Oyj BBB Stable Baa2 Neg Mads Rosendal HOLDNcc Ab BBB- Stable Wiveca SwartingNeste Oil Oyj BBB- Stable Jakob Magnussen HOLDNokia Oyj BB Pos Ba2 Stable BB Stable Ola Heldal HOLDNokian Renkaat Oyj BBB+ Stable Jakob MagnussenNordea Bank Ab AA- Neg Aa3 Neg AA- Stable T. Hovard / L. Holm SELLNorth Atlantic Drilling Ltd BB Stable BB- Sondre StormyrNorwegian Air Shuttle Asa BB- Stable B+ Brian BørstingNorwegian Property Asa BBB- Stable Åse HaagensenNykredit Bank A/S A+ Neg Baa2U Stable A Stable T. Hovard / L. Holm BUYNynas Group B+ Stable B+ Jakob MagnussenOdfjell Se B+ Stable B Bjørn Kristian RøedOlav Thon Eiendomsselskap Asa BBB+ Stable Åse HaagensenOlympic Shipping As B+ Stable B Åse HaagensenOrkla Asa BBB+ Pos Åse HaagensenOutokumpu Oyj B- Pos Mads RosendalPohjola Bank Oyj AA- Neg Aa3 Neg A+ Stable T. Hovard / L. Holm SELLPosten Norge As A- Stable Åse HaagensenPostnord Ab BBB+ Stable Gabriel BerginProsafe Se BB Stable Åse HaagensenRamirent Oyj BB+ Stable Brian Børsting

S&P Moody's FitchDanske Bank Recomm.

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Weekly Credit Update

Ratings from Standard & Poor’s, Moody’s and Fitch and Danske Bank markets shadow ratings

Source: Standard & Poor’s, Moody’s, Fitch, Danske Bank Markets

Analyst(s)

Company Rating Outlook Sr. Unsec Rating Outlook Rating Outlook Rating OutlookSaab Ab BBB+ Stable Wr Wiveca SwartingSampo Oyj Baa2 Stable T. Hovard / L. Holm HOLDSandnes Sparebank BBB+ Stable T. Hovard / L. HolmSandvik Ab BBB Stable Mads Rosendal HOLDSas Ab B- Stable Wr Pos Brian BørstingSbab Bank Ab A Neg A2 Neg T. Hovard / L. Holm HOLDScania Ab A- Stable Mads Rosendal HOLDSchibsted Asa BBB Stable Åse HaagensenSeadrill Ltd BB+ Stable BB Sondre StormyrSecuritas Ab BBB Stable Wr Brian Børsting HOLDSkandinaviska Enskilda Banken Ab A+ Neg A1 Neg A+ Pos T. Hovard / L. Holm BUYSkanska Ab BBB+ Stable Wiveca SwartingSkf Ab BBB+ Stable Baa1 Stable Mads Rosendal SELLSolstad Offshore Asa BB- Stable B+ Åse HaagensenSpar Nord Bank A/S BBB+ Stable T. Hovard / L. HolmSparebank 1 Boligkreditt As A- Stable Lars HolmSparebank 1 Nord Norge A2 Neg A Stable T. Hovard / L. Holm HOLDSparebank 1 Smn A2 Neg A- Stable T. Hovard / L. Holm HOLDSparebank 1 Sr-Bank Asa A2 Neg A- Stable T. Hovard / L. Holm HOLDSponda Oyj BBB- Stable Wiveca SwartingSt1 Nordic Oy BB Stable Jakob MagnussenStatkraft Sf A- Stable Aaa Stable Jakob Magnussen BUYStatnett Sf A+ Stable Wr Stable Jakob Magnussen HOLDStatoil Asa AA- Stable Aa2 Stable Jakob Magnussen SELLSteen & Strom As BBB+ Stable Åse HaagensenStena Ab BB Stable B2 Stable Brian Børsting BUYStockmann Oyj Abp B+ Stable Mads RosendalStolt-Nielsen Ltd BB+ Stable BB Bjørn Kristian RøedStora Enso Oyj BB Stable Ba2 Neg WD Mads Rosendal HOLDStorebrand Bank Asa BBB+ Stable BBB+ Neg Baa1 Neg T. Hovard / L. HolmSuomen Hypoteekkiyhdistys A- Stable T. Hovard / L. HolmSwedavia Ab A- Stable Gabriel BerginSwedbank Ab A+ Neg A1 Neg A+ Pos T. Hovard / L. Holm BUYSwedish Match Ab BBB Stable Baa2 Stable Brian Børsting HOLDSvensk Fastighetsfinansiering Ab BBB Stable Louis LandemanSvenska Cellulosa Ab Sca A- Stable Baa1 Stable Mads Rosendal BUYSvenska Handelsbanken Ab AA- Neg Aa3 Neg AA- Stable T. Hovard / L. Holm HOLDSydbank A/S Baa1 Neg T. Hovard / L. Holm BUYTallink Group As BB Stable BB- Jakob MagnussenTalvivaara Mining Co Plc C Mads RosendalTdc A/S BBB Neg Baa3 Stable BBB Stable Ola Heldal HOLDTeekay Offshore Partners Lp BB- Stable B+ Bjørn Kristian RøedTele2 Ab BBB Stable Ola HeldalTelefonaktiebolaget Lm Ericsson BBB+ Stable Baa1 Stable BBB+ Neg Ola Heldal HOLDTelenor Asa A- Pos A3 Stable Ola Heldal HOLDTeliasonera Ab A- Stable A3 Neg A- Stable Ola Heldal SELLTeollisuuden Voima Oyj BBB Neg Wr BBB Stable Jakob Magnussen BUYThon Holding As BBB+ Stable Åse HaagensenTine Sa BBB+ Stable Ola HeldalUpm-Kymmene Oyj BB Pos Ba1 Stable WD Mads Rosendal HOLDVasakronan Ab BBB+ Stable Wiveca SwartingVattenfall Ab A- Stable A3 Stable A- Neg Jakob Magnussen HOLDVestas Wind Systems A/S BBB- Pos Niklas Ripa BUYWilh Wilhelmsen Asa BBB- Stable Bjørn Kristian RøedVolvo Ab BBB Neg Baa2 Neg BBB Stable Mads Rosendal HOLDYit Oyj B Neg Louis Landeman

Danske Bank S&P Moody's Fitch Recomm.

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Knut-Ivar Bakken

Fish farming (+47) 85 40 70 74 [email protected]

Wiveca Swarting

Real Estate, Construction (+46) 8 568 80617 [email protected]

Ola Heldal

TMT (+47) 85408433 [email protected]

Henrik René Andresen

Credit Portfolios (+45) 45 13 33 27 [email protected]

Brian Børsting

Industrials (+45) 45 12 85 19 [email protected]

Mads Rosendal

Industrials, Pulp & Paper (+45) 45 14 88 79 [email protected]

Lars Holm

Financials (+45) 45 12 80 41 [email protected]

Jakob Magnussen

Utilities, Energy (+45) 45 12 85 03 [email protected]

Åse Haagensen

High Yield, Industrials (+47) 22 86 13 22 [email protected]

Fixed Income Credit Research

Louis Landeman

TMT, Industrials (+46) 8 568 80524 [email protected]

Thomas Hovard

Head of Credit Research (+45) 45 12 85 05

[email protected]

Find the latest Credit Research

Danske Bank Markets: Bloomberg: http://www.danskebank.com/danskemarketsresearch DNSK<GO>

Gabriel Bergin

Strategy, Industrials (+46) 8 568 80602 [email protected]

Niklas Ripa

High Yield, Industrials (+45) 45 12 80 47 [email protected]

Bjørn Kristian Røed

Shipping (+47) 85 40 70 72 [email protected]

Sondre Dale Stormyr

Offshore rigs (+47) 85 40 70 70 [email protected]

Øyvind Mossige

Oil services (+47) 85 40 54 91 [email protected]

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Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske

Bank’). The author of the research report is Gabriel Bergin, Analyst.

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