2007

Crunch Time

Even the relatively small niche market of financing the Scandinavian oil industry is not exempt from world events despite little, if any, change in fundamentals and credit risk. Today, after a quiet summer, markets should be booming in Norway with Nordea, Pareto and DnB NOR busy arranging bond deals. Unfortunately, that is not the case as there is limited liquidity for investment grade or high yield bonds. After a typically quiet July, which is the main holiday month in Norway, and a slower than usual August, it is evident that the subprime mess has reached Oslo.

Lars Kirkeby, a Senior Analyst in Credit Research at Nordea Markets, provided us with some perspective and insights. Our education began with an understanding of how this market developed. Among many, Nordea, Pareto and DnB NOR stand out as the major arrangers of high yield debt, particularly as it relates to oil and shipping, reflecting their industry knowledge and expertise. Adding high oil prices and low benchmark interest rates to the mix provided a strong milieu for potential high returns. And beginning in 2005, a well-educated and primed sales force found the hedge funds, which had begun to focus on this market in their continuous search for the high returns they require. The oil industry, with its huge demand for capital and its recent past difficulties sourcing it was more than willing to provide product to meet the demand. The market transformation can be clearly seen in Figure 3, which demonstrates the growth in issuance as well as the shift to high yield where as Figure 4 shows the shift in credit risk within the categories. As predominantly involves asset based and project financing, the CCC category is the riskiest and its growth reflects its higher yield that makes it attractive to these investors.

This is only an excerpt of Market Commentary – 9/6/2007

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