Nordic Corporate Bonds – What Happens Next – Finance and Banking


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Over the last decade, the Nordic bond market has experienced
significant growth in terms of volume and number of issuers and has
become a viable alternative for issuers across substantially all
industry sectors (not only the real estate sector) and varying
credit profiles seeking debt financing. At the end of 2019 the
total outstanding amount of the Nordic bond market was EUR
1,1122bn, of which EUR 102 billion consisted of corporate bonds
(i.e. excluding FIG and public sector issuers) after approximately
9% of growth over the preceding year. The markets in Sweden and
Norway are by far the larger among the Nordic countries, although
Finland and Denmark have seen increased activity as well. Marketing
is conducted primarily within the Nordic markets, although
depending on the transaction it is fairly common that investors in
other jurisdictions are approached as well.

The Nordic bond market has tracked the exponential growth of
debt securities offerings outside the US generally following last
decade’s financial crisis, supported by the lending restraints
imposed on traditional banks, demand for instruments that offer
some yield in the low interest rate environment, the shorter
average execution timelines, less management involvement required,
lower advisory costs and more developed options for restructuring a
credit if it becomes distressed. Still, many international banks
have yet to participate as placement agents or underwriters for
Nordic bonds, citing concerns over liability, reputational risk and
adherence to stricter disclosure standards. This, in turn, has
given some local players an opportunity to develop the market
further.

Nordic Market vs. Traditional Reg S/144A Marke

The Nordic bond market originally developed locally, with
standards, as will be described below, that deviate from those
traditionally associated with Regulation S (outside the US) or Rule
144A (inside the US to sophisticated investors) offerings, in
particular with respect to the scope of disclosure and concerns
over potential liability under US securities laws. While the market
is still substantially limited to Nordic issuers, as a more robust
international investor base develops, these considerations continue
to be revisited.

The following chart sets out certain material differences
between the process and structure of a Nordic corporate bond issue
and a Reg S/144A offering:















Nordic bonds

Reg S / 144A

Public Credit Rating

Not required. While some issuers have a public rating from one
or more credit rating agencies, particularly in the investment
grade segment, most issuers are not rated and bonds typically do
not have individual ratings.

Required. Although not strictly required by law, investors rely
on corporate and/or instrument ratings in making their investment
decisions and the market standard is to provide at least two
ratings. Credit ratings may also be triggers for covenants being
suspended (upon achievement of investment grade status) or a
requirement for a change of control.

Due Diligence

Limited diligence conducted. Often handled only by way of a due
diligence questionnaire that the issuer fills out and a diligence
bring down call conducted prior to launch. Unless a particular
issue comes to light based on responses received from the company
that would prompt further review, the investment bank and its
counsel would typically not request relevant documentation or
otherwise conduct an independent review of any materials.

In-depth due diligence conducted. Full legal, documentary and
financial due diligence of the last three financial years and
interim period conducted in order to protect underwriters against
potential liability (see below). Due diligence will generally
include a full review of material legal documentation, several due
diligence and drafting sessions and bring down calls. In a
“significant” acquisition or carve-out financing
transaction, the scope of due diligence will also include the
target.

Comfort letter

Not required.

Required. AU Section 634 (SAS 72) comfort letter and
accompanying circle-up required, as well as auditor due diligence
call.

Offering Documentation

Lighter and consists primarily of a term sheet, a company
description, risk factors and financial information. As the
marketing of Nordic bonds is typically limited to institutions and
other accredited investors there is no requirement for a formal
prospectus or other approvals prior to the issuance.

Extensive disclosure included in the Offering Memorandum.
Although not strictly required in Reg S/144A offerings, market
practice is that the disclosure in such offerings is guided by the
requirements of registered offerings in the US and the requirements
of underwriters in order to avoid reputational risks.

Exchange Listing

Typically listed on an exchange or alternative market some time
after the issue date. In Sweden, bonds will usually be listed on
the regulated market NASDAQ Stockholm. This is not due to a formal
requirement, but rather because many investment funds have such
listing as a prerequisite for investing in the bonds.

Similar requirements and rationale as for Nordic bonds, although
generally listed on unregulated markets. Choice of listing venue
may also be influenced by MAR considerations, especially in the
high yield market, depending on the jurisdiction(s) of the
corporate group.

Underwriter Liability

No express or clearly defined liability imposed on mandated
banks. No requirement to establish due diligence defense.

In 144A offerings, Rule 10b-5 under the US Securities Exchange
Act of 1934 creates potential liability for any person who, in
connection with the purchase or sale of a security, (1) employs any
device, scheme or artifice to defraud or (2) makes any untrue
statement of a material fact or omits to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.

Execution timeline

Shorter, mainly due to more limited due diligence exercise and
lighter offering documentation.

Longer, mainly due to full diligence exercise and extensive
offering documentation.

Mandated banks / Underwriters

Nordic-based investment banks

Large international investment banks.

Investor base

Generally limited to more local, nordic-based investors.

International investors.

Principal amount

Typically in the range of US$10 million to US$100 million
(equivalent).

Typically greater than US$100 million (equivalent).

Maturity

Typically 4-5 years, but can often be as short as 3 years.

Typically 5 or 7 years, but can be up to 10 years.

Call Schedule

Typically no call period for 1-2 years, with redemption in full
permitted thereafter at a premium which decreases in steps until
maturity, subject to some ability to refinance at par during last
3-6 months prior to maturity. Equity claws or partial redemption
options are unusual, but are sometimes included.

Fixed rate bonds are generally callable at a make-whole premium
for the first 2-3 years, and thereafter at a premium, which
decreases until par. May also include equity claws or partial
redemption options (such as 10% at 103%).


Floating rate bonds will generally be callable at par after one
year.

Terms

Generally more restrictive than bond terms in the international
markets as maintenance covenants are common and less flexibility is
offered under baskets and permitted exceptions, but looser than for
a corresponding loan financing and fewer covenants.

No maintenance covenants. High yield bonds only include
incurrence based covenants. Restrictions will largely be a function
of credit rating and interest rates although generally looser than
for corresponding loan financing.

As outlined above, Nordic bond issues offers some features that
sets them apart from a Reg S/144A issue. The absence of any
requirement for a public credit rating is an important reason for
how this form of financing is accessible also for smaller issuers
and issues (a Nordic bond offering can be very small although SEK
100,000,000 is often viewed as a minimum threshold for issues where
there is a desire to ensure some level of liquidity). A rating from
an independent credit rating agency is associated with significant
cost and effort, both upfront when the rating is obtained and
continuously in order to maintain it, and this can be a major
hurdle for issuers in the small to mid-market segment of
international debt markets. Underwriters needing to establish a due
diligence defense in 144A/Reg S offerings similarly involves a
costly and time consuming process which can be avoided in Nordic
bond offerings. The more limited due diligence and disclosure also
benefits the issuers by making the process less cumbersome and
costly.

Taken together these features of the offering process in
connection with Nordic bond offerings have resulted in an efficient
and low cost alternative of debt financing, benefiting both issuers
by giving them an alternative form of financing and investors who
wish to invest at attractive yields and in instruments that offers
some level of liquidity. However, since the Covid-19 pandemic hit
with full force earlier this spring the activity in the market for
new issuances of Nordic corporate bonds has been very limited, and
it seems that outstanding bond issues will now be put to the test
more broadly for the first time since this market grew into a
significant force after the last financial crisis. In this context
we find it interesting to explore certain aspects of Nordic
corporate bonds that are particular for this instrument and that
could potentially involve challenges.

  • No credit rating and limited disclosure, diligence and
    arranger liability
    : The strength of Nordic corporate bonds is
    also its weakness in that the efforts of minimizing transaction
    costs for a bond offering also means that less information is made
    available to investors and no meaningful vetting of the issuer and
    its business is conducted. It could be argued, however, that since
    offerings of bonds are often done in connection with an acquisition
    or after a recent IPO they can benefit from the typical vetting
    process involved with such event. Furthermore, it is probably the
    case that investment banks, in the interest of protecting their
    reputation, exercise some level of gate keeping role when selecting
    which issuers to market a bond offering for, based on relationship
    with such issuers and available information. However, the space is
    competitive and participating banks may be tempted to look the
    other way in order to secure a mandate. If we see an increase of
    defaults under outstanding bonds it may bring to light information
    that the investors would have wanted to know at the time of their
    investment decision and which would have been discovered if just
    slightly more diligence and vetting would have been done.

  • Financial covenants. It is fairly common for
    high-yield bonds in the Nordic market to have maintenance
    covenants, and the trend over the recent years has actually been
    for more high-yield issues to have maintenance covenants. Based on
    statistics available through Nordic Trustee 55% of high-yield
    issues in Sweden and 73% of high-yield issues in Norway during 2019
    have financial covenants. While some of these may be a more
    manageable version of financial covenants such as maximum debt to
    equity, minimum liquidity or similar, many will consist of the more
    traditional EBITDA based financial covenants such as maximum
    leverage. As of the date hereof, issuers have already begun seeking
    relief under their financial covenants from the investors due to
    the Covid-19 pandemic, and it seems likely that these requests will
    increase as we approach the financial reporting for Q2 and Q3.

  • Costly process for amendments and waivers of bond
    terms
    . The definitive documentation for a Nordic bond consists
    of terms and conditions entered into with an agent appointed to act
    for the bond investors (Nordic Trustee and Intertrust are most
    often seen in this role). The investors in turn hold the bonds
    through a book entry system maintained by a clearing system (e.g.
    Euroclear for issues in the Swedish market). As in the
    international bond markets, most issues in the Nordic corporate
    bond market are held by a widespread investor collective without
    any other relationships or ties to the issuer. This can put issuers
    in a difficult situation if a need would emerge for any kind of
    relief under the terms. Amendments and waivers require that a
    formal bondholders’ meeting is held or written procedure is
    conducted through the appointed agent in order to obtain the
    requisite consents from the investors. Since the investors
    generally do not have any incentive to maintain a long term
    relationship with the relevant issuers they tend to act
    opportunistically in this context and require consent fees and/or
    other concessions in exchange for consent even for limited changes.
    In addition, fees charged by investment banks for assisting with
    the strategy and communication with investors as well as the legal
    fees can often be viewed as disproportionately high from the
    issuer’s perspective in light of amendment requests that seem
    minimal. While issuers under other debt financing arrangements with
    large investor groups will be in a similar situation, maintenance
    covenants and generally more restrictive covenants will add strain.
    Furthermore, the generally smaller sizes of Nordic bond issues may
    make the issuers more vulnerable to distressed debt investors and
    other investors with a loan-to-own strategy.

  • Short maturities. Maturities for Nordic bonds varies
    greatly but are generally shorter than for loans or bonds in the
    international markets. Maturities are typically 4-5 years, although
    it is not uncommon to have maturities as short as 3 years,
    particularly when necessary in order to build a book of investors
    for less attractive credits profiles in the high-yield segment.
    Based on information made available through Nordic Trustee, much of
    the outstanding volume of corporate bonds will need to be
    refinanced over the course of the upcoming three years. In Sweden
    18%, 24% and 23% of outstanding corporate bonds will need to be
    refinanced during 2020, 2021 and 2022, respectively. A significant
    portion of these will consist of high-yield bonds that may not find
    sufficient demand for another bond on acceptable terms to refinance
    the maturing bond unless the conditions in the market improve.

  • Transaction counsel. In the interest of further
    limiting the transaction costs in connection with Nordic bonds, it
    has been common for the parties to appoint a “transactional
    counsel” with instruction to act for both parties in the bond
    offering. However, as the mandated bank is the one who directs
    which law firm should act in this capacity (and decides whether the
    same counsel would be appointed again for other issues) it can be
    questioned whether the issuing companies for these transactions
    have the benefit of fully independent advice from counsel. If the
    legal counsel is incentivized to first and foremost ensure that the
    marketing of the bond will be successful it may be less inclined to
    negotiate for flexibility under the terms or raise issues that
    could potentially impact the efforts required by the investment
    bank in the marketing of the bond. Chances are that issuers who
    have agreed to a “transactional counsel” arrangement will
    more often later find themselves in a situation where they have
    insufficient flexibility under the terms and will need to seek
    relief from the investors. Fortunately, as the market has matured
    and the typical issuer has become more sophisticated the trend in
    recent years has been that more issuers choose to appoint their own
    separate legal counsel.

  • Exchange listing. The listing provides for a trading
    venue and some liquidity for the bonds (although in practice the
    actual trading activity tends to be limited) and also subjects the
    issuer to certain reporting obligations and market surveillance,
    which is viewed as beneficial by investors. While there are
    positive aspects to a listing, it adds to the burden and cost for
    the issuer. If the issuer does not previously have a listed
    instrument, it will become subject to the Market Abuse Regulation
    as well as the rules on the stock exchange, which both set out
    rules regarding disclosure of inside information and other market
    disclosure and reporting obligations. If a problem would arise
    under the bond terms it provides for another layer of complex
    issues that the issuer will have to navigate since the principle
    rule is that any inside information in the issuer must be disclosed
    as soon as possible.

Where is the Nordic bond market going from here?

The Nordic bond market had another great year in 2019, and the
popularity and steady growth of issuances over the last decade
certainly shows that it has filled a demand from both issuers and
investors. As noted above, however, aside from some temporary rough
stretches in limited segments of the market (e.g. issuers in the
oil and gas industry during 2015- 2016), the Nordic corporate bond
market as a whole has never yet been tested in any significant way.
When the spread of the corona virus developed into a global
pandemic earlier this spring, the activity in the primary market
for Nordic corporate bonds came to a halt, and for high-yield
issuers ceased almost entirely. Over the last months we have
already seen some increased activity from issuers seeking covenant
relief from investors due to the effects from Covid-19 and there
will likely be an increase in insolvencies resulting from upcoming
maturities and issuer defaults under outstanding bonds. It seems
likely that we are now in the beginning of a difficult stretch for
issuers and investors in the Nordic corporate bond market.

If the problems arising in connection with outstanding bonds
increase as the effects of the pandemic materialize, the features
particular to Nordic corporate bonds may result in difficulties for
both issuers and investors. Since these aspects may not have been
relevant and fully appreciated during the booming years since the
last financial crisis, it could bring some important structuring
and legal lessons for these transactions going forwards. Issuers
may re-evaluate the shorter maturities, financial covenants and
absence of independent legal advice from an issuer appointed
counsel in the high-yield segment as they incur excessive costs
later when forced to seek concessions from investors and/or
refinance (or even restructure its debt) at an inopportune time.
Investor’s on their end may see more clearly the cost
associated with investing based on the more limited disclosure and
diligence requirements in a scenario where more issuers default on
or otherwise run into trouble under the bond terms causing losses
on the investments.

In the context of the challenges for issuers and investors of
Nordic corporate bonds that lie ahead, it may be useful to think
about how these debt arrangements can be further improved without
taking away from the very reason for which the market participants
find these so attractive in the first place. Given the smaller size
of issuers and issues in the Nordic bond market it may however not
be feasible (or cost-effective) to fully adopt the standards for
bonds in the international markets. The efficient process and
limited cost associated with issuances of Nordic corporate bonds
are often highlighted as the main benefit of this form of debt
financing. In our view there may however be reason to consider some
measured steps in that direction. It seems likely that some
additional requirements in terms of diligence and disclosure,
whether self-imposed or through regulation, could have a positive
impact on the Nordic bond market by opening up for demand from a
larger collective of international investors who are used to invest
based on more information and currently view Nordic bonds as being
too opaque. A larger group of potential investors would result in
more demand and a larger and more liquid market overall, also
benefitting issuers through lower yields. For issuers who are
looking to issue Nordic bonds or initiate any kind of process with
the investors under an outstanding bond our advice is to retain
their own legal counsel. Unless the economy and the markets
improve, the costs associated with bond terms that have not been
subject to any real review and negotiation from the issuer’s
perspective will materialize and become more clear.

Whatever may come, issuing and investing activities in the
Nordic bond market are here to stay and will likely resume across
all segments (including high-yield) when the dust has settled after
the ongoing corona virus crisis. If the Nordic corporate bond
market continues its upward trajectory, however, it is important to
consider how it can be further improved and the effects from the
Covid-19 pandemic may end up giving us some valuable pointers in
this respect.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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