Introduction to the Nordic Non-Investment Grade Corporate Bond Market

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1 Introduction to the Nordic Non-Investment Grade Corporate Bond Market Paul Gregory Head of Corporate Origination, Debt Capital Markets, Danske Bank 21 October 213

2 Credit Market Backdrop Still Attractive Corporate Funding Conditions High Yield Rally Continues Interest Rates Drop after Fed Meeting Jan/13 Mar/13 May/13 Jul/13 Sep/13 itraxx Xover Recent Volatility Spikes. Jan/13 Mar/13 May/13 Jul/13 Sep/13 EUR Swap 5 year Total Returns Still Increasing Jan/13 Mar/13 May/13 Jul/13 Sep/13 VIX Index 13 Jan/13 Mar/13 May/13 Jul/13 Sep/13 BBG Global HY Corporates Index Source: Danske Bank Markets and Bloomberg 1

3 The Fed Leaves Life Support On Risk On Mode Confirmed Corporate Credit Outlook Key Credit Market Themes Dwindling corporate volume into H2 [EURbn] Macro-news driven investor sentiment: With the first US government shut down since 1996 and further political instability in peripheral Eurozone countries, market dynamics are likely to become more headline driven towards year end Reduced new issue pipeline: Key post summer events and high corporate cash positions are putting an effective damper on primary market activity IG Supply HY Supply Upwards pressure on new issue premia: The combination of a technical tight secondary market, Verizon s richly priced jumbo issue and rising rates expectations are pushing investors to require higher primary market concessions Inter-credit rotation: The more positive recovery outlook and subsequent risk-on sentiment means investors are less concerned with cash preservation and instead starting to chase higher beta yielding propositions (hybrids, cross-over, high yield credits) YTD Investment Grade High Yield Asset re-allocation underway 1, 6, Shift in appetite for duration: Rising rates is impacting bid for longer dated credit as investors re-assess duration risk and shift appetite towards shorter maturities with more buffer Continued support for corporate credit: Strong underlying technical factors supported by ongoing central bank liquidity and changing global demographics will continue to underpin investor demand 5, -5, -1, 4, 2, -2, -4, -6, Source: Danske Bank -15, -8, US Equity World Equity Hybrid Taxable Bond US Municipal Bond Total Equity (RHS) Total Bond (RHS) 2

4 Bps Bps Nordic Corporate Sub Investment Grade Loan Market Loan market is the bond market s biggest competitor Sub-Investment Grade Corporate Loan Margins (213) Averaged Leveraged Loans (BB-) Credit Spreads BB+ BB BB

5 Snapshot of the Norwegian High Yield Corporate Bond Market The third largest high yield bond market in the world! Primary Issue Volumes by Credit Quality (NOKbn) YTD 213 No official ratings in the Norwegian bond market, however bank shadow rating YTD 213 HY issuance of NOK 41 billion vs. NOK 43 billion for 212 BB represents 34% of the issue volumes YTD 213 B represents 42% of the issue volumes YTD 213 CCC represents 24% of the issue volumes YTD 213 BB B CCC CC Tenor & Issue Size (NOKbn) Distribution 6 year 7 year < 5 year 5 year >1.5 > > year is the sweet spot tenor in the Norwegian high yield market with more than 2/3 of all issue volume YTD 213 seen in the 5 year bucket Everything from NOK.1 billion to NOK 2. billion doable Issue size of NOK 1 billion or less dominating with almost 6% of the issue volume YTD 213 Other Industry (NOKbn) & Status Distribution Other Offshore Drilling Shipping E&P Offshore Support Unsec ured Secur ed Dominated by capital intensive and asset heavy industries Oil and Offshore related industries represent about 2/3 of the market YTD 213 Senior unsecured structures represent about 6% of the market YTD 213, typically being legally and structurally subordinated Covenant Frequency & Call Structures (N)IBD/EBITDA Adj. Eq. Ratio Book Eq. Ratio Debt Limitation Liquidity Neg. Pledge Dividend Restr. CoC % 5 % 1 % NC3 NC2 MW <NC2 NC Life Maintenance covenants required in the Norwegian bond market Typically 1 to 3 financial covenants included in the docs Equity ratio and liquidity covenants most frequently used Investors prefer non-call for life (about 47% of all bonds), however NC2 accepted for 3 and 4 year tenors and NC3 accepted for 5 year or longer tenors Source: Stamdata.no, OSE, Nordic ABM, Danske Bank Markets 4

6 Snapshot of the Finnish High Yield Corporate Bond Market Almost half of corporate issuance is sub-investment grade Distribution Of Total Issuance YTD 11% Issuer Issue Date Sector Shadow Rating Issue Amount, Duration & Pricing Key Terms 17% 34% Aug 213 Airlines BB EUR 15m Coupon: 5% MS + 365bps Key Disposals (put at par) Demerger (put at par) 15% 23% Rated IG Unrated IG Rated HY Unrated HY Perpetuals Mar 213 Restaurants B EUR 3m 3 years Coupon: 8% MS + 74bps Maintenance and Incurrence covenants Dividend restrictions Distribution of High Yield Issuance YTD (1) 5% 2% 9% Mar 213 Equipment Rental BB+ EUR 1m 6 years Coupon: 4.375% MS + 338bps IG Style documentation 21% 11% 52% May 213 Bathroom Equipment B1/B+ EUR 25m 3m Eur + 475bps Full International EUR high yield documentation >2 Nordic investors put in orders in excess of EUR3m BB+ BB BB- B+ B CCC+ 1: Danske assessment of shadow ratings for unrated issues. Sanitec is rated by both Moordys and S&P 5

7 SEKbn Snapshot of the Swedish High Yield Corporate Bond Market Market still dominated by investment grade issuance Distribution of Total Issuance Issuer Issue Date Sector Shadow Rating (1) Issue Amount & Duration Key Terms Mar 213 Pharma BB 3 & 5 years SEK 1,m Coupon: 3m Stibor + 22/285bps 7 6 Jun 213 Industrial B2 SEK 1,3m 6 years Coupon: 3m Stibor Senior Secured Issued in conjunction with EUR tranche Full International EUR high yield documentation Sep 213 Airlines Caa1/B- SEK 1,5m 4 years Coupon: 9% New issue yield 9.25% Detailed Negative Pledge Dividend restriction YTD Sep 213 Food & Beverage BB- SEK 1,m Coupon: 3m Stibor+ 31bps Senior Secured Restiction on distributions and incurrence of indebtedness Rated HY Unrated HY Rated IG Unrated IG (1) Danske Shadow Rating 6

8 Snapshot of the Danish Corporate Bond Market A market in the early stages of development Issuer Issue Date Sector Shadow Rating Issue Amount & Duration Key Terms Jun 213 Agriculture & Food BB- DKK 1,m Coupon: 3m Cibor + 425bps Incurrence Financial Covenants in the documentation (Net Debt/ EBITDA and Solvency) May 213 Wireline Telecom/ Services BB- DKK 5m Coupon: 5.7% Senior Secured Issue spread: MS + 484bps Financial covenants in the documentation (Interest Cover, Equity Ratio and Liquidity) Jun 213 Transportation & Logistics BBB DKK 1,m 7 years Coupon: 3.5% Issue spread: MS + 2bps Coupon Step up of 125bps if Net Debt/EBITDA goes beyond 4.X Apr 213 Engineering BBB Two tranches: : DKK 5m Coupon: 3m Cibor + 25bps 7 years: DKK 5m Coupon: 3.625% Senior unsecured Mar 213 Medical Equipment/ Devices BBB- DKK 7.5m Coupon: 3.375% Oct 212 Food & Beverage BBB- DKK 75m Coupon: 3m Cibor + 175bps *Discount Margin mid 7

9 General disclaimer This presentation has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only and should be viewed solely in conjunction with the oral presentation provided by Danske Bank and/or Danske Markets Inc. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ) The presentation has been prepared independently and solely on the basis of publicly available information which Danske Bank considers to be reliable. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness, and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this presentation Danske Bank, its affiliates, subsidiaries and staff may perform services for or solicit business from any issuer mentioned herein and may hold long or short positions in, or otherwise be interested in, the financial instruments mentioned herein. The Equity and Corporate Bonds analysts of Danske Bank and undertakings with which the Equity and Corporate Bonds analysts have close links are, however, not permitted to invest in financial instruments which are covered by the relevant Equity or Corporate Bonds analyst or the research sector to which the analyst is linked Danske Bank is authorized and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request This presentation is not intended for retail customers in the United Kingdom or the United States This presentation is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank s prior written consent

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