Nordic high yield beckons with 10% returns

Jonathan Boyd
Nordic high yield beckons with 10% returns

Low oil prices have been badgering Scandinavian high yield energy bonds. Nobody in the high yield market can say exactly when the bottom will be reached, but many individual issuers and bonds within the energy sector now seem attractive.

The market as a whole also looks attractive with gross returns of around 10%.

Investors with a long term horizon looking for returns on their portfolio in today’s low interest rate environment can begin to build up positions. On top of that, access to this market recently became easier for professional and small investors alike.

Nordic high yield is a €27bn market involving primarily Norway and Sweden. More than half of the high yield bonds in the market come from issuers who receive their orders from the oil and gas industry.

Oil prices should recover

Whether an investment in the Nordic high yield market pays off will depend very much on the development of oil prices.

The oil price has already fallen to a level that has provoked massive cuts to investment plans from the oil companies and we do not believe that the oil price presents much of a downside risk from here.

The industry is in its comfort zone when oil costs between $65-$80. A barrel of oil currently changes hands for around $30, but recovery looks likely medium term. Economists at DNB Markets predict an oil price level of between $70-$80 for the next one to two years. Whether these experts are right depends very much on Saudi Arabia, and to be precise on the amount of oil which the world’s biggest producer pumps out of the ground.

The Saudis have been keeping output artificially high since last year, thereby quite intentionally squeezing prices. Their main aim of  keeping prices low is to force American shale oil producers with their higher production costs out of the market – the fracking boom having made the USA the world’s biggest energy producer in 2014.

The Saudis, however, cannot survive for ever on these kind of competitive prices. Because many projects no longer pay off at the current oil price level, output has dropped long term

A reduced oil price has led to a reduction in investment in the exploration and production sector. This will lead to rapid depletion in oil production in the years ahead. It isn’t a question of whether the oil price and with it the Norwegian kroner will recover, it’s about when.

The supply of corporate bonds in the Nordic market has widened considerably in recent years. The Scandinavian high yield market was itself a growth story from 2001 to 2014; in Norway alone the annual volume of high yield bonds issued rocketed from NOK45bn to almost NOK110bn. Half of Norwegian industrial companies have already raised outside capital by issuing bonds. That means it is now possible to build up a highly diversified portfolio of high yield bonds in different sectors.