Record returns and lower risk are bringing more international investors to the Nordic high yield bond market of €50bn ($54bn).
In 2023, the Nordic junk bond market returned a record 11%.
“Nordic high yield is building a track record of higher returns than both US and European high yield over a longer time period,” Thomas Eriksen, head of credit research at Norwegian investment bank Pareto Securities, said in a presentation at the Pareto Nordic Corporate Bond Conference.
The outperformance “has been driven by solid credit quality in the underlying companies but also helped by a high share of floating rate notes in high yield”.
US and European high-yield bonds are typically fixed rate notes, which are not adjusted as interest rates change.
According to Eriksen, default rates in the Nordic high-yield bond market are also lower than globally.
“The risk-adjusted performance is strong in the Nordic yield market,” he said, and the solid returns and the lower default risk are an “attractive offer for investors”.
Pareto Securities has seen an increasing number of overseas investors entering the Nordic space. It had about 50% international investors in its deals from 2021 to 2023.
“We're seeing quite a big growth in international investors coming into our market, participating in our deals and wanting to increase their exposure to Nordic high yield, ” Eriksen said.
Investors are also attracted by the growing diversification of the Nordic market.
About 10 years ago, Nordic junk bond issuers were totally dominated by shipping companies, oil and gas producers and oil services.
“In the last few years, the market has truly diversified, the return in the market being less dependent on oil price, shipping rates and interest rate levels for real estate,” Eriksen said. “The market is more robust than it has ever been.”
Shipping bonds’ market share has fallen in recent years as companies have not refinanced bonds.
The broader investor base is also helpful for issuers who want to raise capital in the bond market.
So far in the first quarter, €3.4bn has been raised in the Nordic market. Pareto believes the quarter will end “well above” €4bn in issuance volume, which will be close to the record first quarter of 2021.
“The sentiment in the market is currently very strong. We expect that the high activity will continue also in the coming years,” Eriksen said.
Pareto sees an average annual issuance volume of €13bn to €15bn in the coming years, driven partly by the maturity profile, with €40bn of bonds reaching maturity in the next three years.
“This will clearly be an underlying supply driver of new bonds into the market. We’re also seeing a strong underlying growth in the market,” Eriksen said.
“We expect that more companies will come to the Nordics and issue bonds over the coming years as well, leading to an overall growth of the market.”
