Over the last decade, we have seen a tremendous development in the structure of the Nordic high yield market. The changes have been far-reaching and have covered all aspects of the marketplace – diversification in the geographical, issuer and investor dimensions, as well as improved liquidity and transparency.
There has been a change in how banks conduct their business
A common thread underlying these developments has been the change in how banks conduct their business in the wholesale lending market. In the wake of the financial crisis higher capital requirements, as well as other regulatory measures for banks, have led to reduced willingness to lend to clients who are able to fund themselves in the bond market and thus to a steady stream of new issuers in the high yield market and a marked increase in the overall market size.
The Nordic countries are by no means the only markets to experience this effect. We see a similar development in most parts of Europe. The most likely scenario is that this trend will continue and that we will see a larger proportion of wholesale funding taking place directly between investors and corporates, without banks acting as middlemen (except in a role as arrangers of bond deals).
The Nordic high yield market has quadrupled the last decade
The two figures below show how the Nordic high yield market has developed over the last decade. The overall size of the market has quadrupled while the geographical and sector diversification has improved considerably.
Going back 10 years the Nordic high yield market was primarily a Norwegian marketplace, dominated by asset-heavy industries like shipping and, in particular, oil services.
As late as 2014 (before the massive drop in the oil price between august 2014 and early 2016) the oil service sector still made up around 20% of the overall Nordic high yield market. As the figure above shows, since 2014 the oil service sector has shrunk, both in absolute size and, even more, as a percentage of the total market.
Issuance from other sectors than oil has created a much better diversification
At the same time issuance from a variety of companies in other sectors has continued to grow, creating a much better diversification in the market. The sector exposure in the Nordic high yield market now resembles the exposure in a global high yield benchmark.
Historically, the large exposure to the oil service sector has created volatility in the Nordic high yield market. This was especially true in the period 2015 to 2016 as the following figure shows.
The massive drop in the oil price, which affected an oil service industry making up 20 % of the total market, in combination with the global credit sell-off in late 2015 and early 2016 pulled credit spreads in the Nordic high yield market to 1000 basis points. Recently, we have seen a renewed spread widening in the oil service sector but given the improved sector diversification in the market, we see little effect on overall Nordic spread levels.
Taking into account the reduced cyclicality in the Nordic high market following the demise of the oil service sector we think the yield pick-up offered in this market is attractive.
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