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Investment Research 21 November 2014 Weekly Credit Update Headlines G20 Summit in Brisbane ended Contents Market commentary 1 TLAC has removed all activity in the Tier-2 market Selected charts 3 Indices stayed flat during the week Recently published research 5 Official and shadow ratings 6 Market commentary The week started off with the published communiqué from the weekend’s G20 Summit in Brisbane. The new goal is to lift the G20’s GDP by at least an additional 2% by 2018, which could appear ambitious given that many of the western economies are struggling to grow these days. That said, the overall conclusion was that the Summit was rather uneventful and it did not get much attention in the market. What has got a lot attention already is the TLAC (Total Loss Absorbing Capacity) proposed by the global Financial Stability Board ahead of the G20 Summit. As expected, the G20 Leaders welcomed this proposal and expect it to be finalised by the time of the next G20 Leaders’ Summit in November 2015. In short, the TLAC requirement will be set at the higher of 16-20% of risk-weighted assets or twice the Basel 3 leverage ratio (i.e. a minimum 6% of total assets) and, importantly, will have to come on top of the already decided Pillar I capital buffers (i.e. the SIFI buffer, the capital conservation buffer and the counter-cyclical buffer). It is expected to come into force at the earliest in 2019. As we see it, the largest challenge for the Nordic banks will be the threshold of 6% in the leverage ratio and we are a bit uncertain as to how much of the TLAC can be covered by senior unsecured debt. Generally speaking, we expect the TLAC to be quite complex to implement at the EU level, where minimum bail-in-able liability (MREL) requirements have already been agreed as part of the Bank Recovery and Resolution Directive (BRRD). The tight overlap with MREL speaks for a large use of senior unsecured debt. In the Financial Stability Board’s own words, the proposal of the TLAC “is a watershed in ending ‘too big to fail’ for banks” and the final landmark in fixing the system failures that the financial crises had revealed. However, financial reform does not end with this, according to Mark Carney, Governor of the Bank of England and Chair of the Financial Stability Board. In a speech at the 2014 Monetary Authority of Singapore Lecture, he shared some interesting views about future regulation. If you have not read it, we believe it is worth considering for a weekend read. So far, the senior financials have been almost unscathed by the TLAC proposal while the Tier-2 subdebt market has suffered and been rather illiquid ever since. For the general European credit markets, all the major indices traded relatively flat throughout the week. The Itraxx main index (investment grade) widened by an insignificant 1bp w/w while the Itraxx crossover index (high yield) widened by 8bp w/w. Important disclosures and certifications are contained from page 9 of this report iTraxx Europe (investment grade) Source: Bloomberg, Danske Bank Markets iTraxx Crossover (high yield) Source: Bloomberg, Danske Bank Markets Analyst Lars Holm +45 45 12 80 41 lars.holm@danskebank.com www.danskeresearch.com Weekly Credit Update The primary market was fairly active with new issues across the corporate and financial space primarily driven by large and well known UK names printing at the long end of the curve. Selected issues Name KBC Group Astrazeneca Mercialys BSkyB Rating -/BBB+/AA- /A2- /AABBB /- /BBB /Baa2 /BBB - Coupon 2.375% 0.875% 1.787% 1.875% Cur. Tenor EUR 10Y EUR 7Y EUR 8Y EUR 9Y Size 750 750 500 850 Spread* MS + 198 MS + 32 MS + 98 MS + 100 Source: Danske Bank Markets, Bloomberg. Size in million, ratings are issue ratings from S&P/Moody’s/Fitch Trade recommendations See the table below for our current trading ideas. We acknowledge that the credit market in general and the Nordics in particular are not as liquid as other markets, which may affect the possibility to, e g, short a specific bond. Thus, please see our strategies below as ideas and input into your own investment process. New strategies for this week are detailed on page 5 of this report. Past strategies Type Outright Trade COMHSS '19 Curve spread Switch from SKFBSS '19 to SKFBSS '18 or '20 Outright SAABAB '19 Idea COMHSS '19 looks cheap compared to other rated and unrated issues in SEK. Trades like a B+, but is officially rated BBSKF’s 2020s and 2018s offer attractive value relative to the rating (‘BBB+’ NO and ‘Baa1’ S) Downgrade seems priced in already Trading wider than the ‘BBB+’ shadow rating would imply Opened 19 Nov 2014 Start spread Opened 450 18 Nov 2014 Start spread Opened 2 13 Nov 2014 Start spread Curve spread Swith from STENA '19 to STENA '20 Stena 2020 cheap compared with overall Stena credit curve and the Stena 2019 bond. Sector spread Switch from VLVY '19 to METSO '19 Asset allocation Buy iTraxx Main Sell iTraxx Xover Metso trading wider than ‘BBB’ rating suggests. Metso 19s offer substantial pick-up to Volvo’s 19s (neg outlook). IG compression of higher magnitude than HY, due to ECB buying Opened 115 24 Oct 2014 Start spread Opened 126 20 Oct 2014 Start spread Opened -5 20 Oct 2014 Start spread Source: Danske Bank Markets 2| 21 November 2014 www.danskeresearch.com 310 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 Financials spread vs non-financials (Industrials), A-rated Source: Bloomberg, Danske Bank Markets 3| 21 November 2014 www.danskeresearch.com Weekly Credit Update Europe fund flows Sweden fund flows Norway fund flows Source: Macrobond Source: Macrobond Source: Macrobond 4| 21 November 2014 www.danskeresearch.com Weekly Credit Update Recently published research Com Hem (SEK) - Relative value idea Compared with other rated and unrated issues in the SEK universe, COMHSS looks cheap and trades in line with or somewhat wider than names in the B+ area. SKF switch idea The SKF 2019s trade too tight, in our view. We see more value in the SKF 2020s and 2018s. SKF is rated 'BBB+' and 'Baa1' by Moody's. S&P's recently put SKF on negative outlook citing an unexpectedly slow recovery in credit metrics following the acquisition of Kaydon. SKF 2020 and SKF 2018 trade at fair value for a 'BBB' indicating limited downside should SKF be downgraded one notch and potential upside if SKF avoids the downgrade. We recommend investors switch out of the SKF2019s and into either SKF2018s or SKF2020s depending on risk tolerance. AMBU Q4 13/14 - Credit Update Danish healthcare equipment provider Ambu delivered yet another solid quarterly report in Q4 13/14. Revenues in local currency improved 11%, driven by strong pick-up in earnings from the Anaesthesia segment. Group clean EBITDA rose by 56% y/y reflecting the strong sales numbers, cost focus and synergies from the King Systems acquisition. Ambu's reported leverage landed at 2.6x, which is still weak compared with our indicative rating. While our belief in the deleveraging story remains intact on the back of the strong earnings outlook, we are also slightly disappointed in Ambu's pace of deleveraging. The company targets its leverage at 1.75x in the medium term but only guides for 2.2x after the next FY report due to higher dividends. Ambu also has an increasingly aggressive rhetoric around M&A. Further leveraged M&A would be unlikely to be commensurate with our current indicative issuer rating on Ambu of 'BBB-'. 5| 21 November 2014 www.danskeresearch.com Weekly Credit Update Ratings from Standard & Poor’s, Moody’s and Fitch and Danske Bank Markets shadow ratings Danske Bank Company Rating Outlook Sr. Unsec Ahlstrom Oyj B+ Stable Akelius Residential Ab BB+ Pos BB Ambu A/S BBBStable Ap Moeller - Maersk A/S Arla Foods Amba BBB+ Stable Atlas Copco Ab Avinor As Bank 1 Oslo Akershus As BBB+ Stable Bank Norwegian As BBB Stable Beerenberg Holdco Ii As B+ Stable Bw Offshore BB+ Stable Cargotec Oyj BBBStable Carlsberg Breweries A/S Cermaq Asa BB Stable Citycon Oyj Color Group As BBStable B+ Com Hem Holding Ab Danske Bank A/S Dfds A/S BB+ Stable Dlg Finance As BBStable Dna Ltd BBBStable Dnb Bank Asa Dong Energy A/S Dsv A/S BBB Stable Eg Holding B Stable Eika Boligkreditt As AStable Eika Gruppen As BBB Stable Electrolux Ab Elisa Oyj Entra Eiendom As AStable Farstad Shipping Asa BB Neg BBFingrid Oyj Finnair Oyj BB Stable Fortum Oyj Fortum Varme Holding Samagt Med Stockholms Stad Ab Fred Olsen Energy Asa BB+ Neg G4S Plc Getinge Ab BB+ Neg Heimstaden Ab BB Stable BBHemso Fastighets Ab BBB+ Stable BBB Hoist Kredit Ab BBStable B+ Husqvarna Ab BBBPos Ikano Bank Ab BBB Stable Investor Ab Iss A/S J Lauritzen A/S B Stable BJernhusen Ab AStable Jyske Bank A/S Kesko Oyj BBB Stable Klaveness Ship Holding As BBStable B+ Meda Ab BBStable Metsa Board Oyj Metso Oyj Ncc Ab BBBStable Neste Oil Oyj BBBStable Nokia Oyj Nokian Renkaat Oyj BBB+ Stable Nordea Bank Ab North Atlantic Drilling Ltd BB Stable BBNorwegian Air Shuttle Asa BBStable B+ Norwegian Property Asa BBBStable Nykredit Bank A/S Nynas Group B+ Stable B+ Odfjell Se B+ Stable B Olav Thon Eiendomsselskap Asa BBB+ Stable Olympic Shipping As B+ Stable B Orkla Asa BBB+ Pos Outokumpu Oyj BPos Pohjola Bank Oyj Posten Norge As AStable Postnord Ab BBB+ Stable S&P Rating Outlook Moody's Rating Outlook BBB+ Stable Baa1 Stable A AA- Stable Stable A2 A1 Stable Stable Baa2 Stable BBB Stable Baa2 Stable BBA Stable Neg Baa1 Pos Fitch Rating Outlook BBB Stable A Stable A+ BBB+ Stable Stable A1 Baa1 Neg Stable BBB BBB Stable Pos Wr Baa2 Stable A+ Stable A1 Stable A+ Stable ABBB+ Neg Stable A2 Neg A- Neg BBB- Stable AABBB- Stable Stable A1 Stable A- Stable Baa1 Neg B+ BBB Pos Stable B2 Baa2 Pos Stable BB Pos Ba2 Pos BB Stable AA- Neg Aa3 Neg AA- Stable A+ Neg Baa2U Stable A Stable AA- Neg Aa3 Neg A+ Stable BBB+ Stable WD Analyst(s) Mads Rosendal Louis Landeman Jakob Magnussen Brian Børsting Mads Rosendal Mads Rosendal Ola Heldal T. Hovard / L. Holm T. Hovard / L. Holm Øyvind Mossige Øyvind Mossige Mads Rosendal Brian Børsting Knut-Ivar Bakken Louis Landeman Niklas Ripa Ola Heldal Brian Børsting Mads Rosendal Ola Heldal T. Hovard / L. Holm Jakob Magnussen Brian Børsting Jakob Magnussen T. Hovard / L. Holm T. Hovard / L. Holm Brian Børsting Ola Heldal Ola Heldal Bjørn Kristian Røed Jakob Magnussen Brian Børsting Jakob Magnussen Jakob Magnussen Sondre Stormyr Brian Børsting Louis Landeman Louis Landeman Louis Landeman Gabriel Bergin Louis Landeman T. Hovard / L. Holm Brian Børsting Brian Børsting Bjørn Kristian Røed Gabriel Bergin Thomas M. Hovard Mads Rosendal Bjørn Kristian Røed Louis Landeman Mads Rosendal Mads Rosendal Louis Landeman Jakob Magnussen Ola Heldal Jakob Magnussen T. Hovard / L. Holm Sondre Stormyr Brian Børsting Ola Heldal T. Hovard / L. Holm Jakob Magnussen Bjørn Kristian Røed Ola Heldal Bjørn Kristian Røed Ola Heldal Mads Rosendal T. Hovard / L. Holm Ola Heldal Gabriel Bergin Source: Standard & Poor’s, Moody’s, Fitch, Danske Bank Markets 6| 21 November 2014 www.danskeresearch.com Recomm. BUY SELL HOLD SELL HOLD HOLD HOLD BUY BUY SELL BUY BUY HOLD BUY HOLD HOLD HOLD SELL HOLD SELL Weekly Credit Update Ratings from Standard & Poor’s, Moody’s and Fitch and Danske Bank Markets shadow ratings Company Prosafe Se Ramirent Oyj Saab Ab Sampo Oyj Sandnes Sparebank Sandvik Ab Sas Ab Sbab Bank Ab Scania Ab Schibsted Asa Seadrill Ltd Securitas Ab Skandinaviska Enskilda Banken Ab Skanska Ab Skf Ab Solstad Offshore Asa Spar Nord Bank A/S Sparebank 1 Boligkreditt As Sparebank 1 Nord Norge Sparebank 1 Smn Sparebank 1 Sr-Bank Asa Sponda Oyj St1 Nordic Oy Statkraft Sf Statnett Sf Statoil Asa Steen & Strom As Stena Ab Stockmann Oyj Abp Stolt-Nielsen Ltd Stora Enso Oyj Storebrand Bank Asa Suomen Hypoteekkiyhdistys Swedavia Ab Swedbank Ab Swedish Match Ab Svensk Fastighetsfinansiering Ab Svenska Cellulosa Ab Sca Svenska Handelsbanken Ab Sydbank A/S Tallink Group As Tdc A/S Teekay Offshore Partners Lp Tele2 Ab Telefonaktiebolaget Lm Ericsson Telenor Asa Teliasonera Ab Teollisuuden Voima Oyj Thon Holding As Tine Sa Upm-Kymmene Oyj Vasakronan Ab Vattenfall Ab Vestas Wind Systems A/S Wilh Wilhelmsen Asa Volvo Ab Yit Oyj Rating BB BB+ BBB+ BBB+ BBB BB+ Danske Bank Outlook Sr. Unsec Stable Stable Stable Stable Stable Stable BBBBB+ A- Stable Stable Stable Wr Baa2 Stable Fitch Rating Outlook BBB BA A- Neg Stable Neg Stable Wr A2 Pos Neg BBB A+ Stable Neg Wr A1 Neg BBB+ Neg Baa1 Stable A2 A2 A2 Neg Neg Neg BB A+ Pos B+ A AA- Stable Stable Stable Stable Stable BBB+ Stable B+ BB+ Stable Stable BBB+ AA- Stable Stable Stable BBB Moody's Rating Outlook Stable BBB+ BBBBB S&P Rating Outlook AA+ AA- Stable Stable Stable Aaa Wr Aa2 Stable Stable Stable BB Stable B2 Stable BB BBB+ Stable Neg Ba2 Baa1 Stable Neg WD A+ BBB Neg Stable A1 Baa2 Neg Stable A+ Pos AAA- Stable Neg Baa1 Aa3 Baa1 Stable Neg Neg AA- Stable BBB Neg Baa3 Stable BBB Stable BBB+ A ABBB Stable Stable Stable Neg Baa1 A3 A3 Wr Stable Stable Neg BBB+ Neg ABBB Stable Stable BB+ Stable Ba1 Stable WD A- Stable A3 Stable A- Neg BBB Neg Baa2 Neg BBB Stable BB Stable BB Stable BB- BBBBB Stable Stable B+ BBB+ BBB+ Stable Stable A- Stable BBBBBB- Pos Stable B Neg Analyst(s) Øyvind Mossige Brian Børsting Louis Landeman T. Hovard / L. Holm T. Hovard / L. Holm Mads Rosendal Brian Børsting T. Hovard / L. Holm Mads Rosendal Ola Heldal Sondre Stormyr Brian Børsting T. Hovard / L. Holm Louis Landeman Mads Rosendal Øyvind Mossige T. Hovard / L. Holm Lars Holm T. Hovard / L. Holm T. Hovard / L. Holm T. Hovard / L. Holm Louis Landeman Jakob Magnussen Jakob Magnussen Jakob Magnussen Jakob Magnussen Ola Heldal Brian Børsting Mads Rosendal Bjørn Kristian Røed Mads Rosendal T. Hovard / L. Holm T. Hovard / L. Holm Gabriel Bergin T. Hovard / L. Holm Brian Børsting Louis Landeman Mads Rosendal T. Hovard / L. Holm T. Hovard / L. Holm Jakob Magnussen Ola Heldal Bjørn Kristian Røed Ola Heldal Ola Heldal Ola Heldal Ola Heldal Jakob Magnussen Ola Heldal Ola Heldal Mads Rosendal Louis Landeman Jakob Magnussen Niklas Ripa Bjørn Kristian Røed Mads Rosendal Louis Landeman Source: Standard & Poor’s, Moody’s, Fitch, Danske Bank Markets 7| 21 November 2014 www.danskeresearch.com Recomm. HOLD HOLD HOLD HOLD HOLD BUY SELL HOLD HOLD HOLD BUY HOLD SELL BUY HOLD BUY HOLD BUY HOLD BUY HOLD HOLD HOLD SELL BUY HOLD HOLD BUY HOLD Weekly Credit Update Fixed Income Credit Research Thomas Hovard Head of Credit Research (+45) 45 12 85 05 hova@danskebank.com Louis Landeman TMT, Industrials (+46) 8 568 80524 llan@danskebank.com Henrik René Andresen Credit Portfolios (+45) 45 13 33 27 hena@danskebank.com Mads Rosendal Industrials, Pulp & Paper (+45) 45 14 88 79 madro@danskebank.com Jakob Magnussen Utilities, Energy (+45) 45 12 85 03 jakja@danskebank.com Brian Børsting Industrials (+45) 45 12 85 19 brbr@danskebank.com Gabriel Bergin Strategy, Industrials (+46) 8 568 80602 gabe@danskebank.com Niklas Ripa High Yield, Industrials (+45) 45 12 80 47 niri@danskebank.com Bjørn Kristian Røed Shipping (+47) 85 40 70 72 bred@danskebank.com Ola Heldal TMT (+47) 85408433 olh@danskebank.com Øyvind Mossige Oil services (+47) 85 40 54 91 omss@danskebank.com Sondre Dale Stormyr Offshore rigs (+47) 85 40 70 70 sost@danskebank.com Lars Holm Financials (+45) 45 12 80 41 laho@danskebank.dk Knut-Ivar Bakken Fish farming (+47) 85 40 70 74 knb@danskebank.com Find the latest Credit Research Danske Bank Markets: http://www.danskebank.com/danskemarketsresearch 8| 21 November 2014 Bloomberg: DNSK<GO> www.danskeresearch.com Weekly Credit Update 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 Lars Holm, Senior Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised 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 Conduct Authority and the Prudential Regulation Authority (UK). 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Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in nonU.S. financial instruments may entail certain risks. Financial instruments of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission. 10 | 21 November 2014 www.danskeresearch.com
