seb report: high yield still our preferred choice

8/7/2019 SEB report: High yield still our preferred choice

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Important: Your attention is drawn to the statement on the back of this report which affects your rights

Credits cushioned by strong fundamentalsWEDNESDAY

9 MARCH 011

HIGH YIELD STILL OUR PREFERRED CHOICE

With the recent hawkish stance from the ECB, implying rising underlying rates, we continueto recommend taking on credit risk rather than duration when looking for additional yieldpickup. Hence, HY credits and among investment grade credits, the higher yielding and

more volatile financial sector, continue to be our preferred choice.POSITIVE OUTLOOK FOR CORPORATES DESPITE INCREASING COMMODITY PRICES

Solid global growth, weather disturbances and turmoil in the Middle East and North Africahave combined in pushing commodity prices substantially higher. This has raised amultitude of questions and concerns, such as: Can price increases be passed on to theconsumers? Will high oil and commodity prices kill the economic recovery? Our most recentFinancial Officers surveysuggest that though concerns about high raw material prices haveincreased, the overall picture remains positive with most companies regarding their businessand financial positions as favourable and express willingness to make more investmentsgoing forward.

GEOPOLITICAL ISSUES NOT A MAJOR THREAT TO CREDIT SPREADS

European corporate credit markets have been resilient to the most recent increase in riskaversion, driven by unrest in the Middle East and North Africa. This makes sense to us giventhe fact that corporate fundamentals remain strong, spreads are not unreasonably low andthe relatively attractive additional yield pickup that credits offer. Additionally, credit spreadshave historically been resilient even during times of war. Hence, there is historical supportfor credits being resilient against geopolitically driven risk aversion. However, problemscould arise if unrest in the Middle East leads to a prolonged period of very high oil prices.

Ability to raise prices to compensate for raw material costs HY spread to 5yr German government yield

0%

10%

20%

30%

40%

50%

60%

70%

Very good Good Weak Very weak Not relevant

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

1000%

Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10

HY spread as percent of government yield

Source: SEBs Financial Officers Survey Source: SEB, Markit


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Nordic Credit Quarterly

ContentsCredit Strategy 3Default rates 8Primary markets activity 10Macro economic trends 15

Commodities outlook 17Credit quality trends 18Nordic banks 4Industrials 8Oil & Gas 3Pulp and paper 33Shipping/Offshore 36Telecom 38Utilities 4Nordic bonds and CDS recommendations 45SEBs Financial Officers Index 47Quarterly report dates 48

Contributors to this issue

Ebba LindahlFinancials, Industrials+46 8 506 3 08

Jonas RannebyCredit strategy+46 8 506 3 01

Henrik BlymkeNorway, Oil & Gas+47 8 7 85

Ruben SharmaQuantitative analysis+46 8 506 33 67

Nina GlifbergTelecom, Utilities

+46 8 506 3 10

Jonas ShumShipping, Offshore

+47 8 71 75

Disa HammarPaper, Industrials+46 8 506 3 69

Johan JaveusMacro outlook+ 46 8 506 30 19

Bjarne SchieldropCommodities+46 8 506 30 7

SALES CONTACTS

Sales Stockholm+46 8 506 3 19/0

Sales Helsinki+358 9 616 8650

Sales London+44 80 739 8898

Sales Oslo+47 8 7 59

Sales Frankfurt+49 69 977 1145

Sales Copenhagen+45 33 17 77 3

This report was published on March 9, 011

Note: all stated spreads are indicative and not necessarily based on actual trades. ASW asset swap spreads. N.A. not available.
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


3/52

3


Credit strategyWhen looking forward over the next 3-6 months the picture that emerges has not changedsignificantly since our December 010 Nordic Credit Quarterly. At that time we said that itfelt like the world was stuck in the same track and the corporate credit market wasdominated by macro issues, in particular sovereign debt issues. While the outlook is slightly

more positive today, and the ECB certainly more hawkish, macro issues remain thedominant theme as does sovereign issues. Though the focus has, at least for the moment,shifted east away from Europe and to the Middle East and North Africa, and in characterfrom debt concerns to geopolitical concerns. However, we anticipate that the European debtstory will resurface again later this year, as it has done numerous times over the last 1-months, leading to increased volatility. Consequently, our credit market forecasts andrecommendations remain intact. We continue to prefer higher yielding names and sectors(financials). As the chart below illustrates, this has been a fairly good strategy so far thisyear. High yield continues to perform strongly (up 3.09% YTD) and financials (up 0.54%YTD) continue to outperform the overall investment grade index (down 0.11% YTD) on atotal return basis. It is interesting to note that despite all the negative sentiment surroundingthe financial sector, performance has been relatively solid so far this year.

YTD total return iBoxx Investment grade and High yield ASW spread

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

03-Jan 13-Jan 23-Jan 02-Feb 12-Feb 22-Feb 04-Mar

iBoxx HY YTD iBoxx IG YTD Stoxx 600 YTDiBoxx Financials YTD iBoxx German Gov YTD SEK IG YTDSEK gov YTD

125

130

135

140

145

150

155

160

03-Jan 13-Jan 23-Jan 02-Feb 12-Feb 22-Feb 04-Mar320

340

360

380

400

420

440

460

iBoxx Corp IG (LHS) iBoxx Corp HY (RHS)

Source: SEB, Markit, Bloomberg Source: SEB, Markit

iBoxx Investment grade spread iBoxx High yield spread

0

100

200

300

400

500

600

Jan-99 Jul -00 Jan-02 Jul -03 Jan-05 Jul -06 Jan-08 Jul -09 Jan-11

iBoxx Corp IG Average default implied IG

0

400

800

1,200

1,600

2,000


iBoxx HY Average default implied HY

Source: SEB, Markit Source: SEB, Markit


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4


Geopolitical issues not a major threat to credit spreadsWhile the sovereign concerns at the moment largely have shifted in character fromEuropean debt woes to geopolitical concerns in the Middle East and North Africa, sovereignissues nevertheless remain in focus. What has changed, at least slightly, is how resilient theEuropean corporate credit market has been to the increased risk aversion. As seen from thechart below, even the volatile iTraxx Main index has been more stable than the VIX indexwould suggest, and the iBoxx Investment grade bond index has been even more resilient tothe most recent increase in risk aversion. This makes sense to us given the fact thatcorporate fundamentals remain strong, spreads are not unreasonably low and the relativelyattractive additional yield pickup credits offer (see charts on page 5). Additionally, as seenfrom the chart below, which displays US BBB spreads since 1919, credit spreads havehistorically been resilient even during times of war. Hence, there is historical support forcredits being resilient against geopolitically driven risk aversion. However, problems couldarise if unrest in the Middle East leads to a prolonged period of very high oil prices.

US BBB spread during periods of war

-50

50

150

250

350

450

550

650

750

1919 1927 1935 1943 1951 1959 1967 1975 1983 1991 1999 2007

US BBB spread

WW2

Korean WarVietnam War

Gulf War Iraq War

Source: SEB, Bloomberg

iTraxx Main vs. VIX Index iTraxx Main vs. Stoxx 600

90

95

100

105

110

115

120

Jan-03 Jan-13 Jan-23 Feb-02 Feb-12 Feb-22 Mar-0414

16

18

20

22

24

iTraxx Main (LHS) VIX Index (RHS)

90

95

100

105

110

115

120

Jan-03 Jan-13 Jan-23 Feb-02 Feb-12 Feb-22 Mar-04

275

280

285

290

295

iTraxx Main (LHS) Stoxx 600 (RHS Reverse scale)

Source: SEB, Bloomberg Source: SEB, Bloomberg


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5


Corporate fundamentals remain solidBusiness sentiment remains solid, as demonstrated by, for example, our latest FinancialOfficers Surveywhich shows that respondents feel that the business climate is even strongerthan in our previous survey in November. Most officers believe higher volumes willcontribute to improved profitability during the current year, and expect to be able toincrease prices in order to compensate for higher raw material costs. Consequently earningsexpectations remain high. Credit quality continues to improve as well, as shown by, forexample, the improving potential downgrade vs. potential upgrade ratio. For more detailsregarding our view on overall credit quality, see the Credit quality trends section.

Spread to yield Credit still offers an attractive premiumFrom a valuation and risk premium perspective, the relative extra pickup from taking creditrisk vs. government risk is adequate. To illustrate this point we have included two graphsbelow showing the current investment grade and high yield spread over 5yr Germangovernment rates as a percentage of the current government yield. For example, if thecurrent spread were 100bps and the government yield % the measure would be 50%.Currently, we are at a level of, 107% and 18% for investment grade and high yield bonds,respectively. As seen from the chart below these levels remain relatively high from ahistorical perspective, especially for investment grade. Despite the fact that investmentgrade credits display a level that is higher when compared to its history, we think that thenoticeably higher yield (see charts below) high yield credits offer will outweigh this fact inthis low rate environment. Consequently we believe investors will continue to view high yieldcredits as a more attractive opportunity, lending it technical support.

IG spread to 5yr German government yield HY spread to 5yr German government yield

0%

50%

100%

150%

200%

250%

300%

Jan-99 Apr-00 Jul-01 Oct-02 Jan-04 Apr-05 Jul-06 Oct-07 Jan-09 Apr-10

IG spread as percent of government yield

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

1000%


HY spread as percent of government yield


iBoxx Investment grade average yield iBoxx High yield average yield

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(%)

iBoxx Corp IG

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

2003 2004 2005 2006 2007 2008 2009 2010 2011

(%)

iBoxx HY



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6


Banking regulation remains in focusWe anticipate regulation in general and banking regulation in particular will continue to be amajor factor throughout 011. While there have not been major changes made to the BaselIII regulation over the last couple of months, regulation surrounding government support forbanks is an increasingly hot topic. The early January bail-in consultation paper from theEuropean commission had a fairly significant, but short-lived, market impact. The fact thatthe consultation paper had such a significant market impact was interesting consideringthat that Denmark, Germany and the UK already had regulation in place that is fairly similarto the initial EC proposal. Clearly, as seen in Denmark (for more details see the Nordic bankssection), governments are willing to force even senior bank bond holders to suffer losses.Ireland could be the next country where we will see this new approach by governments inpractise. Consequently, rating agencies are currently busy re-assessing bank ratings without,or at least with limited, government support. As seen from the chart below, the ratingdowngrades could be fairly significant. However, judging from downgrades made byMoody's to Danish banks, as well as subordinated bank debt in Germany (the Germanlegislation mainly affects subordinated debt), the actual downgrades will likely be morelimited in scope. Partly due to the fact that the average uplift on a country level likely

overestimates the actual uplift a more stable bank has received. The other reason being thefact that banks are becoming far more stable on a stand-alone basis, as forced by Basel IIIregulation

Average government support uplift in Sr bank ratings

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Canada

Denmark

France

Germany

Ireland

Italy

Japan

Portugal

Spain

UnitedKingdom

UnitedStates

Source: SEB, Moodys

We continue to like FinancialsAs we have for a long time, we still regard financials as an attractive sector opportunity,despite all the negative sentiment surrounding the financial sector. In our opinion, thenegative effects of coming bank regulation is already priced in current spreads, as wasevidenced by the fact that German Sub debt widened only modestly and Danish Sr. debttightened on the back of recent downgrades (see charts on the next page). As has been thecase, financials will continue to be a more volatile sector and there will be periods ofwidening for financials, probably driven by renewed European sovereign fears or regulationconcerns. However, as we have said in the past, we view these as buying opportunities. Inthe current low yield environment, financials continue to represent an attractive yield pickup

opportunity over non-financials, as shown by the chart below.


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7


5yr CDS spreads around time of downgrade

105

110

115

120

125

130

Jan-01 Jan-11 Jan-21 Jan-31 Feb-10 Feb-20 Mar-02

100

125

150

175

200

Danske Bank 5yr Sr CDS (LHS) Deutsche Bank 5yr Sub CDS (RHS)

Downgrade

Downgrade


Sr Financials vs. Sr Non-Financials

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Jul-03 Apr-04 Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11

Sr Financials vs. Sr Non-Financials

Source: SEB, Markit

HY still our preferred choiceAs members of the more optimistic camp, we have been more concerned with risingunderlying rates than corporate spreads widening. With the recent hawkish stance from theECB, that concern has if anything increased. Consequently, we continue to recommendtaking on credit risk rather than duration when looking for additional yield pickup. Hence,high yield and among investment grade credits, the higher yielding and more volatilefinancial sector, continue to be our preferred choice. High yield looks especially attractivegiven our current 1-month forward looking default rate forecast. Both for the US and theEuropean region we forecast 1-month default rates well below average while spreads

remain above average. For full details regarding our default rate forecasts, see the Defaultrates section.


8/52

8


Default ratesAs expected the global 1-month rolling high yield default rate continues to drop. Defaultrates in February declined to .68% in the US and in Europe to 1.5%. As shown in the chartbelow, the number of defaults each month has fallen since March last year, both in the USand worldwide, and January was the first month since June 007 with no defaults globally.

We now forecast a 1-month rolling high yield default rate of .55% in the US and 1.1% inEurope by December 011. For full details of our default rate forecasts see the two graphs onthe following page.

Number of monthly HY defaults

0

5

10

15

20

25

30

35

40

45

Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10

US Europe Other

Source: SEB, Moodys

Default rate modelBelow we present our model forecasts (updated to December 011) for 1-month rollingdefault rates in European and US speculative-grade markets. Our default rate models arebased on several key financial indicators with a proven strong historical record of predictingturning points in the default cycle. More specifically our models incorporate 1-monthlagged values for:

C&I lending standards from the Feds Loan Officer Survey

US initial unemployment claims

European industrial production

S&Ps US distress ratio*

S&Ps weakest links **

*Defined as speculative-grade issues with spreads above 1,000 bps

**Defined as B- or lower rated credits with negative outlook or CreditWatch negative


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9


European speculative-grade default rate forecast US speculative-grade default rate forecast

0%

2%

4%

6%

8%

10%

12%

14%

16%

2000-09 2001-09 2002-09 2003-09 2004-09 2005-09 2006-09 2007-09 2008-09 2009-09 2010-09 2011-09

European speculative-grade default rate Model Forecast

0%

2%

4%

6%

8%

10%

12%

14%

1991-10 1993-10 1995-10 1997-10 1999-10 2001-10 2003-10 2005-10 2007-10 2009-10 2011-10

U.S. speculative-grade default rate Model Forecast

Source: SEB, Moodys Source: SEB, Moodys

Speculative-grade default rate forecast December 2011

Market Implied

Europe

(5yr average)

SEB

Europe

SEB

U.S.

S&P

U.S.

Moody's

US

Moody's

Europe

6.3% 1.1% 2.6% 1.8% 2.1% 1.1% Source: S&P, Moodys and SEB. Market implied rate is a 5yr average and assumes a 40% recovery rate.

12-month default rates 1982 February 2011 Market implied default rate (5yr average)

0%

2%

4%

6%

8%

10%

12%

14%

1982-01 1985-01 1988-01 1991-01 1994-01 1997-01 2000-01 2003-01 2006-01 2009-01

U.S. speculative-grade default rate European speculative-grade default rate

2%

4%

6%

8%

10%

12%

14%

16%

18%

2004-06 2005-03 2005-12 2006-09 2007-07 2008-04 2009-01 2009-10 2010-07

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Crossover (LHS) Main (RHS)

Source: S&P Source: SEB, Bloomberg


10/52

10


Primary market activityEUR: TOTAL ISSUANCE

The trend towards decreasing corporate issuance seen in 010 continued at the beginningof this year. So far this year, total issuance in the EUR bond market has amounted to EUR

17.3bn, representing a % decline compared with the same period last year. Manyinvestment grade issuers remain cash rich and many companies have limited investmentrequirements, limiting their need for funding. Acquisition activity has increased however andcould positively affect supply this year.

EUR non-financial issuance

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

YTD

EURbn


Several Nordic names issue in EURSo far this year a number of Nordic names have issued in the euro market. After havingpostponed the sale of a new hybrid capital bond in December due to volatile marketconditions, Dong (Baa1/A-) issued its new EUR hybrid capital bond in January. The bond,which totalled EUR 700m and was issued at m/s +450, is due 3010, and callable in 01. Atthe same time Dong repurchased its outstanding EUR 1.1bn callable subordinated capitalsecurities. In February, TeliaSonera (A3/A-) issued a 9yr EUR 750m fixed bond priced atm/s+90, while TDC (Baa/BBB) issued a 4yr EUR 800m fixed bond priced at m/s+90 and a7yr EUR 800m fixed bond priced at m/s+10. Volvo (Baa/BBB-) has also been in themarket with two smaller FRN issues, a yr EUR 100m bond priced at EURIBOR +65bps andan 18 month EUR 100m bond priced at EURIBOR +55bps.

New bank regulation drives new types of subordinated debtNew regulations, including the Basel III rules, announced during 010 could affect bankscapital requirements and as a result the banks have begun investigating additional ways offunding themselves. In February, Credit Suisse (Aa/A) issued a 30yr USD bn contingentconvertible bond also known as cocos at a yield of 7.875%. The bonds will be convertedinto equity if the banks core Tier1 capital ratio or common equity Tier 1 ratio falls below 7%.They will be callable after 5.5 years with a final maturity date of 041. This issue representedthe first public sale of cocos by a major European bank and it was oversubscribed 11 timesdemonstrating strong interest. This type of issue could provide investors with a cushionagainst losses compared with traditional subordinated debt while reducing the risk oftaxpayer-funded bailouts.


11/52

11


Nordic bond issues in EUR

Company Rating Issuance date Maturity date Amonut issued Spread (m/s) Yield

DONG Baa1/A- 2011-01-13 3010-06-01 EUR 700m 450 -

TeliaSonera A3/A- 2011-02-18 2020-02-18 EUR 750m 90 4.365

Volvo Baa2/BBB- 2011-02-11 2013-02-18 EUR 100m Euribor +65 1.739

TDC Baa2/BBB 2011-02-15 2018-02-23 EUR 800m 120 4.429

TDC Baa2/BBB 2011-02-15 2015-02-23 EUR 800m 90 3.569Volvo Baa2/BBB- 2011-02-18 2012-08-28 EUR 100m Euribor +55 1.638


Activity in the HY segment was particular robust during H 010 with FY 010 issuancetotaling EUR 45.6bn compared to EUR 9.5bn in 009. So far in 011, HY issuance is down4% compared with the corresponding period in 010.

HY non-financial issuance

0

5

10

15

20

25

30

35

40

45

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

YTD

EURbn


The HY segment has accounted for 1% of issues YTD 011 compared to 18% in the sameperiod last year. At the same time, BBB-rated issuers have comprised 44% of issuance andcompanies rated A- or higher 35%.

Issuance by sector (Jan Feb 2011) Issuance by rating (Jan Feb 2011)

Utilities22%

Oil & Gas

0%

Telecom

30%

Industrial

0%

Basic Materials

3%

Auto24%

Retail

3%

Consumer

9%

Other

4%

Pharma5%

A35%

BBB44%

HY21%

Source: SEB, Bloomberg Source: SEB, Bloomberg. *High yield includes non-rated issues


12/52

1


The telecom, automotive and utility sectors have been most active in the primary marketthis year, comprising 30%, 4% and %, respectively of issued volume. During the sameperiod, the five year segment has still been most used, accounting for 31% of issuance. Thesix and seven year segments remain popular as well, accounting for 19% and 18% of issuedvolume respectively so far this year.

We believe renewed M&A interest beginning late last autumn will continue this year andmay benefit issuance. Further, we expect the bond-for-loans trend to be maintained whichshould drive a large share of refinancing volumes in 011. We expect the total amountissued this year to be similar to last year. We see continued strong interest in BBB and HYissuance.

SEK PRIMARY MARKET ACTIVITY

A total of SEK 186bn was issued in 010, down % from 009. At the beginning of this year,the trend of recovering volumes continued with total SEK bond issuance year-to-date of SEK3bn, corresponding to an increase of % compared to the same period last year.

SEK denominated issuance by financial institutions has declined by 19% to SEK 15bn year-

to-date, and represent 47% of the total amount issued in the SEK market. A total of 14financial institutions, compared to 13 during the corresponding period last year, have issuedbonds in the SEK market, of which 11 were non-Nordics, accounting for 45% of volumeissued by financials.

SEK Total issuance 2008-2010 and YTD 2011

0

50,000

100,000

150,000

200,000

250,000

2008 2009 2010 2011 YTD

MSEK

Corporates Financials Gov./Muni. owned Gov. guaranteed


As of March , SEK corporate issuance had increased by 6% to SEK 6.9bn from SEK 4.0bnduring the same period last year. The largest bond issuer was Volvo (Baa/BBB-) whichissued five bonds totalling SEK 3.8bn between January and March, four with floating ratesand one fixed. Their terms were as follows: a yr SEK 500m bond priced at STIBOR +100; an18 months SEK 1.3bn bond priced at STIBOR +85; an 18 months SEK 1bn bond priced atSTIBOR +80 and finally two yr SEK 500m bonds issued in March at STIBOR +97 and m/s +97.

It remains attractive for Euro-zone based issuers to issue in SEK due to the wide EUR/SEKbasis swap. For example, KFW has issued three bonds and EIB two, together totalling SEK

4.bn. At the same time, as domestic Swedish issuers have limited financing requirementswe expect only modest SEK issuance and expect total issuance to be in line with 010 levels.


13/52

13


While Euro HY market issuance has increased compared to the same period last year,corresponding HY activity in the SEK market has been low. With institutional investorsshowing little interest in HY names in a SEK market lacking rated HY companies we do notexpect a similar trend in the SEK HY market to that seen in its EUR counterpart.

SEK Total Monthly issuance

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

January

February

March Ap

rilMay

June Ju

ly

August

September

October

November

December

2008 2009 2010 2011


NOK: PRIMARY ACTIVITY STILL DOMINATED BY HIGH YIELDS

With around NOK 8.5bn of corporate bonds issued or announced in the Norwegian marketsince January 1, the new year has started strongly, even though volumes lag those during thesame period last year due to the issue of a single large convertible bond by Petrobakken inQ1 010. Excluding that issue, volumes this year have increased slightly. HY companiescontinue to dominate activity, accounting for 73% of total issuance. Despite decreasingslightly compared to last year, we still believe HYs will represent a very high share in 011 aswell, due to the maturing HY bonds in 01 in particular, which are likely to be refinancedthis year.

As many large, well capitalised IG companies have limited funding requirements in 011, weexpect modest primary activity. Increased M&A could represent a swing factor, as well as anincreased interest to diversify funding sources. We believe easier access to bank funding still

represents a factor that will reduce the supply of IG corporate bonds this year, which isunfortunate for the bond investors who have shown strong demand for these rare (non-utility) credits lately.


14/52

14


NOK corporate bond issuance - by year NOK corporate bond issuance by rating

0

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000

90 000

2005 2006 2007 2008 2009 2010 2011

NOKm

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

Investment Grade High Yield Percentage of HYs

CCC & lower

8 % A

21 %

BB

34 %

BBB

6 %

B

31 %

Source: SEB, Stamdata Source: SEB

The oil related industries are still dominating the primary activity in the Norwegian corporatebond market in 011, as it did in 010. In terms of shadow ratings, BB rated companies are

the most active issuers, as they were last year. In terms of individual names, this yearslargest issuers are: Aker Drilling (NOK 1.5bn), Ship Finance (NOK 0.75bn), DannemoraMineral (NOK 0.7bn) and Solstad Offshore (NOK 0.7bn).

IG primary issue spreads (2011) HY primary issue spreads (2011)

BKK

Energiselskapet

Buskerud

E-CO EnergiBKK

Vardar

PostenHafslund

-

25

50

75

100

125

150

175

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Years to maturity

Spread(bps) Det norske

oljeselskap

Host Hoteleiendom

Wilh Wilhelmsen

Morpol

Olympic Shipping

Aker Drilling

Prosafe SE

Solstad Offshore

IM Skaguen

Dannemora Mineral

200

300

400

500

600

700

800

900

1000

1 2 3 4 5 6

Years to maturity

Spread(bps)

7

Source: SEB Source: SEB

Norwegian primary and secondary market spreads in Q1-11Since our latest Nordic Credit Quarterly, published in early December 010, there have beenseveral significant bond issues coming to market. In particular, the Aker Drilling bondattracted interest due both to its size (NOK 1.5bn) and the companys re-listing on the Oslostock exchange. The company issued a fixed and a floating tranche paying Nibor +700bps.

We also noted Posten, the only corporate IG non-utility issuer in 011, which attractedstrong interest and closed within a very short period.

So far this quarter, NOK secondary market spreads have tightened slightly among IGcompanies, and somewhat more among the HY companies. Consequently, the spill-overeffect from increased debt concerns regarding PIIGS countries and the Middle East unrestdoes not yet appear to have affected corporate NOK spreads.


15/52

15


Macro economic outlookSELF-SUSTAINING RECOVERY AND FASTER NORDIC RATE HIKES

The global economic recovery appears to be on a firmer footing in most parts of the worldand in need of less support from massive monetary and fiscal stimulus. Several central

banks have already embarked on a rate hike cycle while many others are approaching thepoint where rate increases begin. While rates will be raised in several countries this yearglobal monetary policy remains highly accommodative and should continue to supportgrowth this year.

In the US economic signals have remained upbeat even though the labour market recoveryis still lacklustre. The housing market also remains a drag on the economy but early signsthat prices are stabilising have recently emerged. In Europe the division between north andsouth is clear. Germany is growing strongly with leading business cycle indicators suggestingthis will continue. Indebted PIGS countries are still struggling with necessary austeritymeasures likely to severely restrict growth for several years. Nevertheless, the Europeandebt crisis has entered a calmer phase with less market turmoil and lower risk to the euro.The establishment and likely expansion of the European rescue mechanism (EFSF) hastherefore had the intended effect. While not excluding the possibility that debt problemsmay re-emerge, if they do we would expect events to unfold in a more orderly fashion.

We expect global growth of around 4.5% in 011. While the overall outlook appearspromising there are threats to a benign scenario. Inflation is returning in many countries andmay force central banks to lift rates more rapidly than they may otherwise have done. Of themajor central banks the ECB has expressed most concern with a rate hike at its next meetingin April now very likely. Also, the BOE looks set to raise rates in coming months while we stillexpect the Fed to remain sidelined this year due to the continued weak labour market andlow inflation.

In those countries where inflation is increasing, it is being driven mainly by rising food and

energy prices. While accurately projecting changes in prices is difficult, we expectinflationary pressure to ease eventually. Food price increases appear to have been largelythe result of bad weather (la Nna) while oil prices have risen sharply on the back of recentpolitical turmoil in the Middle East. While the situation should normalise eventually, the nearterm still presents upside risks to commodity prices and therefore to inflation implying aneed for central banks to remain vigilant. Read more about our view on commodities onpage 17.

Global GDP growth (y-o-y % change)

2009 2010 2011E 2012E

United States 2.6 2.9 3.6 4

Japan -6.3 4 1.6 1.6

Germany -4.7 3.6 3.1 2.5China 9.2 10.3 9.5 8.5

United Kindom -4.9 1.4 1.5 2.5

Euro zone -4 1.7 1.9 1.8

Nordic countries -4.6 2.9 3.4 2.6

Sweden -5.3 5.7 4.7 2.6

Norway -1.4 0.1 2.7 2.5

Denmark -4.7 2.3 2.6 2.3

Finland -8.1 2.7 3.5 3

Baltics -15.6 1.2 4.1 4.7

OECD -3.5 2.7 2.8 2.8

Emerging markets 2.6 7.1 6.5 6.5

Source: OECD, SEB


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Superior Nordic fundamentals continue to pay offNordic countries continue to benefit from strong economic fundamentals particularly theirlow sovereign debt levels and balanced budgets, as well as more generally ongoing strongeconomic expansion in Germany. The Swedish economy reported record 7.3% y/y GDPgrowth in Q4 while we forecast a solid 4.7% increase in 011. In response we expect theRiksbank to hike rates at every meeting this year, implying a repo rate of .75% by year end.Rate hikes together with strong exports and solid fundamentals mean that the Swedishkrona is likely to continue to strengthen. However, we expect the economy to be able toadapt well to a stronger currency, an argument supported by our own surveys among bothlarge and small export companies. The Riksbank also believes the strong SEK reflects truefundamentals and should therefore not obstruct continued normalisation of the repo rate.

The Norwegian central bank will also resume its rate hike cycle this spring with GDP growthslightly above trend (.7% y/y). Nevertheless, Norges Bank has been more concerned aboutexcessive NOK appreciation which will slow Norwegian rate hikes this year. Other Nordiccountries are expected to report solid growth in 011.


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Commodities outlookCommodity prices moved to new red hot levels in February, lifted higher by constructivegrowth and recovery, still plentiful liquidity as well as an additional geopolitical boost tocrude oil prices from the developments in the Middle East and North Africa (MENA) region.Commodity prices will receive further growth driven tail wind and support going forward,

especially from the US and the Eurozone while monetary settings will continue to beaccommodative for a while more. Commodity prices could thus move further up fromcurrent record high levels. Nonetheless, levels are high and prices are becoming stretchedand increasing volatility lies ahead.

February - a strong month for commoditiesSince the start of February the UBS Bloomberg CMCIPI commodity index has moved up3.%. The precious metals sub index gained the most (+8.9%) and moved to a new all timehigh as a result of the MENA unrest and flight to safety. The second strongest mover was theenergy sub index (+6.5%) that was pushed higher by a combination of US and Europeanrecovery as well as the added risk premium in the oil price due to the MENA uprisings. Themetals sub index also made gains (+3.%) over the period supported by strong growth in

global manufacturing with the US and Europe the strongest drivers.

The overall result is that commodity prices have reached new all time highs with purchaseprice inflation and costs rising on a geographically broad basis. This has raised a multitudeof questions and concerns. Can price increases be passed on to the consumers? Shouldinterest rates be increased more rapidly in an effort to dampen commodity induced inflationor should further interest rate hikes be put on hold as high commodity prices in general andoil prices especially are putting a heavy taxation on further global growth? Will high oil andcommodity prices kill the economic recovery? On the last question the US Federal Reserveestimates that a $10/b rise in the oil price cuts global growth by 0.%. If the oil price remainsat the current level it thus shaves off some 0.5% of global growth versus a more fair oil priceof about $90/b. This is so far manageable. However, if it continues towards $150/b due to

the ongoing crisis in the MENA region, global growth could be strongly impacted. High oilprices and recessions have a grim history with most of the major recessions since the 1970sbeing preceded by spikes in the oil price.

CMCIPI index Price of Brent Crude (USD per barrel)

800

1 000

1 200

1 400

1 600

1 800

2 000

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

60

70

80

90

100

110

120

130

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Source: Bloomberg, SEB Source: Bloomberg, SEB


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Credit quality trendsCREDIT QUALITY STABILISING VOLUME GROWTH IN FOCUS

Credit quality in the Nordic region is showing signs of stabilising after a massive recovery in010. Earnings reports for the fourth quarter of last year confirmed the recovery with

maintained strong balance sheets, solid earnings improvement and improving sales growth.With further efficiency improvements becoming more difficult to achieve, the key to futureearnings growth will be volume increases.

While the economies of the Nordic countries are growing strongly, most large corporates inthe region generate a majority of their sales in other geographical regions. Thus salesgrowth could still be hampered by the exposure of corporates to the ongoing sovereignturmoil, and their dependence on the speed and depth of the economic recovery at globaland regional levels.

The fourth quarter reports of these companies did however show strong sales and orderintake. In fact, 8 of the 34 Nordic companies in our coverage reported higher revenuescompared with the same period last year. Industrials achieved the strongest sales growth in

Q4-10, 19% on average, with further increases expected based on a strong order intake andoptimistic outlook statements from most companies generally.

Sales growth q-o-q Regional exposure by sector

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Q1-06

Q2-06

Q3-06

Q4-06

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Industrials Pulp and Paper Telecomequipment

Telecomoperators

Utilities, Oil andGas

Europe North America South America Asia & Australia Africa & Middle East Other

Source:: SEB, company reports Source:: SEB, company reports

Emerging markets, especially in Asia, remained the major driver of growth even if companiesare increasingly seeing demand growth in North America and Europe. Companies ability tocapitalize on continued solid demand in emerging markets to offset slower growth indeveloped countries will remain a key to solid operating performance. Over the next twoyears, we expect GDP to increase by 6-7% in emerging economies, compared to Eurozonegrowth of just below % and US growth of 3%-4%.

Slower margin expansion in 2011Rebounding volumes in 010 in combination with the realization of effects of cost cuttingexecuted in 009 and 010 resulted in substantially improved margins. Profitabilitycontinued to improve in the fourth quarter as a result of higher capacity utilisation, costcutting in 009 and 010 and price increases. Of the 34 Nordic companies in our coverage,3 posted higher absolute EBITDA and 1 reported improved EBITDA margins in Q4-10compared to Q4-09. The Industrial and utility sectors continued to perform strongly whilemargin pressure increased the most in the pulp and paper sector. However, compared toconsensus expectations overall profitability disappointed slightly due to increasing rawmaterial costs and negative currency effects in Sweden and Norway.

As we head into 011 restructuring programs are winding down and further improvingefficiency and costs is becoming more difficult. To maintain strong margins, companiesmust now increase production while maintaining control over costs as volumes increase. We


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believe there is some uncertainty regarding to what extent the massive cost cuts in recentyears will prove to be permanent as some costs are likely to be reintroduced as productionlevels increase. Some companies could expand margins slowly over 011, for instance, incases where asset utilization in terms of both labour and production line capacity canaccommodate further volume growth.

Average EBITDA margin by industry FOS: Ability to raise prices to compensate for raw material costs

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Industrials Consumerproducts

Pulp & Paper Telecom Utiliti es

Q4 2008 Q4 2009 Q4 2010

0%

10%

20%

30%

40%

50%

60%

70%

Very good Good Weak Very weak Not relevant

Source: SEB, company reports Source: SEB

Rising raw material costsCommodity prices have been rising since the summer and momentum has strengthened inrecent months. Price increases are driven by the strong growth in raw material intenseemerging market economies as well as the beginning recovery of more mature markets. Inaddition, there has been a significant element of speculative trading contributing to thedevelopment. Increasing geopolitical risks related to the development in the Middle Eastcould fuel prices further in the near term.

While this development will weigh on corporate profits going forward Nordic corporates arequite confident that they can raise prices to offset the increasing costs, at least according tooutlook statements in the recently published quarterly reports. SEBs Financial OfficersSurveyalso recently showed that around 70% of financial officers believe that theircompanys ability to raise prices to compensate for increasing costs is good or very good.Rising raw material prices are a sign of economic growth and most likely the expectedcontinued rise in demand is the explanation for this positive stance.

FX headwinds could affect Swedish and Norwegian profitsA major trend in the Q4 reports was the negative impact of exchange rates on corporateprofitability, particularly in Sweden and Norway. SEB forecasts that both the SEK and theNOK will continue to strengthen versus the EUR throughout the year, indicating that thisnegative effect will continue in 011. While companies seem to believe that they are able tocompensate for higher raw material costs by raising prices, this could be more difficult in thecase of negative FX effects as they do not affect all players equally. However, according torecent surveys, including SEBs Financial Officers Index, Nordic corporates do not appear tooconcerned regarding the impact of a stronger currency. A stronger currency is usually thenatural consequence of a stronger economy, and possibly companies are expecting strongergrowth to compensate for currency effects.

Everything else being equal, the relative winners from a stronger SEK among companies inour coverage are for example SAS, Electrolux and ABB, while the relative losers are, amongothers, Atlas Copco, Securitas, Volvo, Sandvik, SKF and Ericsson.


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FOS: What EUR/SEK level will problematic for your financial performance?

0%

10%

20%

30%

40%

50%

60%

70%

It already has 8.80 8.40 8.00 The level of the

exchange rateis not critical to

our business

Source: SEB

Strong balance sheetsAfter a period with conservative financial policies balance sheets are in very good shape.During the fourth quarter of last year leverage multiples continued to decline in virtually allsectors. In total 8 of the 34 companies in our coverage reduced net debt compared to theprevious quarter. In addition, with further improvements in 1-month rolling EBITDA, debtmultiples including net debt to EBITDA either declined or remained unchanged for 30 out of34 Nordic companies. Only SKF, M-real, Norske Skog, and Elisa reported increases.

*Average net debt to EBITDA *Average net debt to EBITDA by industry

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2007 2008 2009 2010 2011E 2012E

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Industr ia ls Consumerproducts

Pulp & P aper Telec om Ut ilities

FY 2008 FY 2009 FY 2010

Source: SEB, *Excluding companies in net cash position or with negative EBITDA Source: SEB, *Excluding companies in net cash position or with negative EBITDA

but increasing shareholder pressure for dividendsThe strong financial positions among Nordic corporates in combination with the strongeconomic climate in the region are leading to increased shareholder pressure for moreaggressive financial policies. As a result we have seen a very clear trend toward higherdividend distributions this year. Slightly more than 70% of companies raised their dividendcompared to last year and nearly 70% actually announced larger dividends than marketconsensus expectations. A few companies, for example TeliaSonera and Atlas Copco, evenproposed share buy-backs. While higher returns to shareholders are generally considered anegative from a credit quality perspective, the fact that companies now believe that theneed for a strong balance sheet is of less importance is a solid sign of strengtheningconfidence in the economic recovery.


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While increased shareholder distributions will weaken balance sheets the proposeddistributions are well within most companies current ratings capacity. We also believecompanies will be careful to protect their credit ratings as access to capital markets isincreasing in importance as banks struggle with higher funding costs and regulatory issues.

Proposed dividend level Dividend level vs. consensus expectation

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

increased unchanged decreased

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

higher in line lower

Source: SEB, company reports Source: SEB, company reports

Merger and Acquisition activity increasingAs an alternative to paying out dividend or buying back shares, companies are increasinglyusing their strong financial positions for acquisitions. In the Nordic region a number of largerdeals have been announced over the last few months, including ABBs USD 4.bnacquisition of Baldor and Assa Abloys SEK 11bn bid for Cardo. While we expect M&A activityto continue to increase we also believe companies will seek to avoid ratings downgrades bybalancing external growth opportunities with debt capacity, as in the case of ABB wherecredit metrics will remain fully consistent with current ratings despite the substantial size ofthe cash funded acquisition.

M&A volumes (12 months rolling) Cash and cash % of sales (aggregate)

0

50

100

150

200

250

300

350

400

Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

USDbn

Global North America Western Europe

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2007 2008 2009 2010 2011E 2012E

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Total Cash/sales

Source: SEB, Bloomberg Source: SEB, company reports

Capex to remain at relatively modest levelsCapex is also starting to expand moderately following severe restraint in the last two years.In the Nordic countries, capex for 010 declined in all sectors except telecom. During thesecond half of the year, the vast majority of companies began to increase capex investmentshowever. Particularly the industrial sector saw large increases, although coming back fromvery low levels. With capacity utilisation rates still relatively low due to enhanced efficiency,capex needs are not acute and we believe industrial companies can maintain a rather

moderate investment level in 011. Global macro concerns also remain tangible enough thatmost corporates are cautious in their outlooks on spending and investment.


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Positive rating momentum in the Nordics has continued into 2011Consistent with this improved performance, positive rating actions accelerated during 010.Overall, a total of 33 positive rating actions involving Nordic companies occurred in 010(including ten rating upgrades, twenty one outlook revisions, and three reviews forupgrade), far outnumbering the total of 13 negative rating actions affecting nine Nordiccompanies (comprising four downgrades, five outlook revisions and four reviews).

During the beginning of this year the positive ratings momentum in the Nordic region hascontinued. Ratings upgrades have included S&Ps upgrade of Atlas Copco to A from A-,Moodys and Fitchs upgrades of Carlsberg to Baa and BBB from Baa3 and BBB-, andMoodys and S&Ps upgrades of TDC to Baa and BBB from Ba and BB. The only negativerating actions so far this year were Moodys and S&P announcement of reviews of theirrespective A and A ratings on Nokia.

Credit ratings of nearly two thirds of Nordic corporates are now back at levels consistentwith, or even better than, before the crisis (January 007), as demonstrated in the chartbelow. The companies that have a weaker rating include pulp and paper companies, Nokiaand SAS, which are all struggling with structural issues in their respective industries. Volvo,

Autoliv, and Sandvik also have lower ratings as they were severely impacted by therecession. Swedish Matchs weaker ratings are on the other hand the result of a moreaggressive financial policy.

Rating level 2010 vs 2007 Outlook distribution, Nordic corporates

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Higher Same Lower

Moodys S&P

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Positive Stable Negative

Moodys S&P

Source: S&P, Moodys Source: S&P, Moodys

Few negative rating outlooks in the NordicsThe recent number of rating actions has also resulted in nearly 80% of credit ratings in theNordic region now having stable outlooks. This indicates that overall credit quality isstabilising and the room for further upgrades is limited. Only six of the 34 companies in ourcoverage have a negative outlook, which mostly reflects structural issues in some sectors oracquisition activity.

The trend with upgrades easily outnumbering downgrades in the Nordic region is not thesame for the rest of Europe. Sovereign unrest in some areas and the resulting downgrades ofsovereign credit ratings is prompting downgrades of financial institutions and governmentrelated entities in the affected regions.


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Potential downgrade vs. potential upgrade ratio, Europe and U.S.

0

2

4

6

8

10

12

14

Jan-95 Jul-96 Jan-98 Jul-99 Jan-01 Jul-02 Jan-04 Jul-05 Jan-07 Jul-08 Jan-10

Downgrade vs. upgrade ratio (U.S.) Downgrade vs. upgrade ratio (Europe)

Source: S&P

Key figures and rating views

YE 2010 YE 2010

EBITDA margin Net debt/EBITDA Moody's S&P SEB

Industrials ABB 14.1% -1.2 A3/Stable A/Stable A/Stable

Assa Abloy 19.2% 1.5 - A-/CWN A-/Stable

Atlas Copco 24.2% 0.3 A3/Stable A/Stable A/Stable

Autoliv 16.3% 0.2 - BBB+/Stable BBB/Positive

Metso 10.6% 1.5 Baa2/Stable BBB/Stable BBB/Stable

Norsk Hydro 8.0% -1.5 Baa2/Stable BBB/Stable BBB/Stable

Sandvik 18.5% 1.6 - BBB/Stable BBB+/Stable

Scania 18.7% -0.2 - A-/Neg A-/StableSKF 18.7% 1.5 A3/Stable A-/Stable BBB+/Stable

Vestas 22.4% 0.7 - - BBB/Negative

Volvo 11.5% 0.9 Baa2/Stable BBB-/Stable BBB/Positive

Pulp and paper Holmen 19.7% 2.1 - BBB/Stable BBB/Stable

M-real 6.8% 4.8 B3/Pos B-/Stable B-/Pos

Norske Skog 6.8% 8.3 B2/Neg B-/Neg B-/Neg

Stora Enso 8.9% 2.8 Ba2/Pos BB/Pos BB/Pos

UPM 13.5% 3.1 Ba1/Stable BB/Stable BB+/Stable

Telecom Elisa 32.1% 1.6 Baa2/Stable BBB/Stable BBB/Stable

Ericsson 16.9% -1.5 Baa1/Stable BBB+/Stable BBB+/Neg

Nokia 11.5% -1.2 A2/RPD A/CWN BBB+/Stable

TDC 41.2% 2.1 Baa2/Stable BBB/Stable BBB/Stable

Telenor 28.9% 0.7 A3/Stable A-/Neg BBB+/Stable

TeliaSonera 33.7% 1.3 A3/Stable A-/Stable A-/Stable

Other AP Moeller Maersk 26.1% 0.9 - - A-/Stable

Carlsberg 16.4% 2.4 Baa2/Stable BBB/Stable

Electrolux 9.3% 0.2 - BBB+/Stable BBB/Pos

Investor na na A1/Stable AA-/Stable A+/StableSAS 7.4% 3.4 Caa1/Stable B-/Stable B/Stable

SCA 14.9% 2.4 Baa1/Stable BBB+/Stable BBB+/Stable

Securitas 8.1% 2.1 - BBB+/Stable BBB+/Stable

Swedish Match 32.3% 2.0 Baa2/Stable BBB/Stable BBB/Stable

Utility & energy DONG na na Baa1/Stable A-/Stable BBB+/Stable

Fortum 59.7% 2.7 A2/Stable A/Stable A-/Stable

Statkraft 60.4% 1.4 Baa1/Stable A-/Stable BBB+/Stable

Statoil 38.6% 0.5 Aa2/Stable AA-/Stable AA-/Stable

Vattenfall 27.8% 2.9 A2/Stable A/Neg A-/Stable

Source: SEB, Company reports


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4


Nordic banksDECLINING CREDIT LOSSES AND STRONGER EARNINGS PROSPECTS

Nordic banks will benefit from a strong economic environment as the region enters a periodof expansion following the recent economic crisis. Interest rates have begun rising and are

expected to continue to do so over the medium term, driving profits for Nordic banks. Signsare also appearing which suggest that corporate lending is about to increase. The positiveeffect of rising volumes will probably be partly offset by margin pressure as companiesrefinance expensive loans taken in 008 and 009. However, slightly surprisingly, Nordeareported increasing corporate lending margins in Q4-10 and guided a continuedimprovement.

Retail lending volume growth will be negatively affected by higher interest rates althoughthe yield on existing business will improve. In addition, political measures to slow consumerlending due to home price inflation and high credit driven consumption will slow lendinggrowth. Banks have also implemented more prudent loan-to-value restrictions themselves.

Credit losses by region, 2008-2010 Credit losses 2008-2010

-1000

0

1000

2000

3000

4000

5000

6000

7000

Sweden

Denmark

Finland

Norway

Ireland/N

I

Baltic

Russia/Ukraine

Other

2010 2009 2008 -2000

0

2000

4000

6000

8000

10000

12000

2008 2009 2010

Other

Russia/Ukraine

Baltic

Ireland/NI

Norway

Finland

Denmark

Sweden


Some Nordic banks were hit by the crisis due to their exposure to the Baltics (Swedbank andSEB) and Ireland (Danske Bank). They have probably put the worst behind them with theresult that credit losses should continue to decline as asset quality improves. The largeNordic banks reported new loan loss provisions of EUR 4.3bn in 010 compared with EUR11bn in 009 and EUR 3.3bn in 008. In 011 loan loss reversals may even positively impactthe earnings of some banks as excess provisions are reversed.

Credit losses in Denmark remain higher than in other Nordic countries due to persistentpressure in the small- and midsized corporate and real estate sectors, negatively affectingasset quality. Danske Bank also continues to report credit losses in Ireland.

Nordic banks are well capitalisedAll Nordic banks are better capitalised than the average for European large banks andalready comply with proposed Basel III core tier 1 ratios. All larger Nordic banks exceptDanske Bank currently pay dividends again with target pay-out ratios generally of between40% - 50% of net income. Pressure for higher shareholder returns could increase further, infact Swedbank is already planning share buybacks. However, we expect capital ratios eitherto remain stable or improve marginally in 011 as banks await further clarification ofregulatory requirements.


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Basel III Core Tier 1 ratios

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

Swedbank SHB DnB NOR SEB Danske

Bank*

Nordea European

large bankaverage

Systemically important buffer

Counter cyclical buffer

Capital conservation buffer

Minimum core equity

Source: SEB Enskilda. *Post hybrid repayment

Swedish banks are however likely to be subject to tougher capital requirements sooner thanthe Basel III rules suggest. The Swedish FSA has suggested that the core tier 1 ratio shouldbe 10%-1% and the total capital ratio 15%-16% within a few years. This reflects therelatively large size of the Swedish banking sector. Currently, total assets of the four largestbanks (Nordea, Handelsbanken, Swedbank and SEB) amount to four times Swedens GDP.However, we do not regard these higher capital requirements as cause for concern as theSwedish banks already fulfil, or are close to fulfilling them. Discussions are also taking placeregarding raised risk weighting of residential mortgages. Currently, Swedish residential

mortgages are risk weighted at 5%-6%. Raising the weighting to 0% would probably bemanageable for Swedish banks.

Funding is normalisingWithdrawal of government support packages has not disrupted banking system stability ormaterially affected access to funding for most banks in the Nordic region. Fundingnormalised for Nordic banks in 010, even though spreads were higher than they were priorto the crisis. The relative strength of Nordic banks should continue to attract liquidity in011. However, they are relatively reliant on wholesale funding in the form of coveredbonds. Swedbank, Handelsbanken and Danske Bank have relatively low deposit-to-loanratios due to their substantial domestic mortgage lending.

Nordic banks, deposit-to-loan ratios Regulatory Tier 1 ratio, YE 2010

0

10

20

30

40

50

60

70

SEB OP-

Pohjola

Nordea DnB NOR Danske

Bank

Swedbank SHB Nykredi t

Realkredit

2010

2009

0

2

4

6

8

10

12

14

16

18

20

OP-

Pohjola

D nB NOR Nordea SEB Nykredi t

Realkredit

Swedbank SHB Danske

Bank



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6


Regulation in focus Denmark leading the wayPolitical efforts are intensifying to ensure that taxpayers money is not called on again tosupport banks. Currently there are many different regulatory initiatives being discussed tointroduce various forms of bail-in debt at senior as well as subordinated levels. ConcerningAmagerbankens failure, Denmark was the first country to use a new policy frameworkwhere senior debt holders and depositors share the cost of bank bail-outs.

In short, the Danish framework involves the creation of the Danish Financial StabilityCompany (FSC), a joint venture between the Danish State and the Danish financial sector,aimed at ensuring financial stability in Denmark, including winding-up distressed banks. Ifsuch a bank does not fulfil adequate capital requirements it may choose to be wound upunder the FSC. The FSC will set up a subsidiary company to take over all assets of thedistressed bank and subsequently wind up the bank in a controlled and efficient manner.The takeover sum is calculated as the total of the expected selling price of the assets at thetransfer date regardless of goodwill and other intangible assets subject to a deduction ofcosts of disposal. So far 11 Danish banks have been taken over and are now subsidiaries ofFSC.

The Danish decision in February to wind-up Amagerbanken in line with the new frameworkresulted in the banks equity, subordinated debt and hybrid core capital being effectivelywiped out. This produced an expected loss of around 41% for depositors (outside ofDenmarks deposit-guarantee scheme) and providers of senior unsecured debt. During thethree months following the transfer further recoveries on the banks assets may result inadditional liabilities being transferred to the new bank, reducing the expected loss fordepositors and holders of senior unsecured debt.

Possible funding pressure for small Danish banksThe fact that depositors (above DKK 750,000) and senior creditors of Amagerbanken willneed to take a haircut could impose increasing funding pressure on smaller Danish banks.Depositors now avoid having more than the insured minimum in any single Danish bank,

resulting in deposits being spread throughout the entire banking system. Large depositorsmay also prefer to take their deposits abroad. We believe Danske Bank may be taking asubstantial share of deposits from smaller banks, which in turn may result in greaterconcentration of deposits.

Several Danish banks also have significant refinancing requirements as the governmentsindividual guarantees expire before the end of 013. Total outstanding individualguarantees amount to around DKK 150bn. The largest issuer of government guaranteeddebt is FIH Erhversbank with DKK 47.5bn. Amagerbanken had DKK 13.5bn in governmentguaranteed debt at the time of its failure.

Rating downgrades exacerbate funding concernsRecent downgrades of Danish banks due to loss of systemic support, and potential further

downgrades, could exacerbate refinancing difficulties. Following the bankruptcy andtransfer of Amagerbanken to the FSC, Moodys downgraded the senior ratings of five Danishbanks (Danske Bank, Spar Nord Bank, FIH Erhversbank, Ringkjobing Landbobank, andBankNordik). According to the rating agency, the combination of the enactment of BankPackage III in October 010 and its implementation in connection with Amagerbanken inFebruary 011 demonstrates both the willingness and ability of the Danish government touse resolution tools provided under new legislation to impose losses on depositors andsenior creditors in a bankruptcy.

Consequently, Moodys has reduced the systemic support assumptions it uses for Danishbanks, downgrading senior debt and deposit ratings of five banks by between one and twonotches and removing systemic support completely from all but the four largest banks in

Denmark (Danske Bank + notches, Nordea Bank Denmark + notches, Jyske Bank +1notch, and Sydbank +1 notch).


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7


As the agency will further assess the governments intentions, the debt ratings of the fourbanks retaining a systemic uplift in their ratings have been placed on review for furtherdowngrade.

Could more Danish banks fail?In September 010 Amagerbanken raised DKK 898m in new capital and reported adequate

capital ratios for Q3-10 including a core capital ratio of 8.8%, a tier 1 ratio of 13.9%, and asolvency ratio of 19.1%. However, in February 011 an assessment by the banks newlyappointed management revealed the need for an additional DKK 3.1bn write-down resultingin negative pro forma equity of DKK 654m. This raises the concern that there could be morehidden losses at Danish banks. However, as approximately 5 large corporate clients(primarily in the construction sector) were the main reason for the bankruptcies amongDanish banks and these clients are now bankrupt themselves, most losses should havealready been taken by the banking system.

The lacklustre performance by the Danish property market in recent years is also a majorreason for the troubles now facing smaller Danish banks. At national level Danish houseprices have fallen by around 15% partly due to oversupply and partly to speculation. The

decline is consistent with what has occurred in many other countries but neverthelessdistinguishes Denmark from its neighbours Sweden, Norway and Germany which haveenjoyed a much more favourable development.

Solid Danish finances limit risk to government guaranteed debtLike many other countries Denmark also suffered a sharp deterioration in public financesduring the recent economic and financial crisis. The government has introduced austeritymeasures which, in combination with improving growth, should begin to reduce the deficitas a share of GDP in coming years. We expect the budget deficit to shrink to .5% of GDP byend 01. Total government debt is low by international standards and gives no cause forconcern. We expect Danish government debt to stabilize at 46% of GDP in 011 and 01.Our overall conclusion is that Danish public finances are solid and that the government

should have no trouble meeting its guarantees to the financial sector.

General government budget balance

90 92 94 96 98 00 02 04 06 08 10 12

-6

-4

-2

0

2

4

6

8

10

PercentofGDP

-6

-4

-2

0

2

4

6

8

10Ecfin forecast

House prices

NorwaySwedenGermanyDenmark

USUKIreland

07 08 09 10

60

70

80

90

100

110

120

Index2006=100

60

70

80

90

100

110

120

Source. Ecowin Source. Ecowin

Limited contagion risks for nowCurrently, the risk of contagion to Sweden and Norway is limited given the strength of thehousing market and the absence of domestic credit losses in those markets. Furthermore,Sweden and Norway have not implemented similar bail-in regulations (Bank Package III).However, the Danish framework is consistent with proposed EU legislation. It is therefore

likely that other countries will eventually follow suit.


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IndustrialsCONTINUED STRONG RECOVERY

Nordic industrials reported a continued strong recovery in Q4 010 with operating resultsfor all companies in our coverage posting year-on-year top line growth, and all except SKF

achieving sequential sales increases. A total of 11 industrials in our coverage secured anaverage 19% y/y increase in sales in Q4 with the strongest growth still seen in emergingmarkets although sales in North America finally turned upward and strong sales growth wasalso noted in Scandinavia and Germany.

Sales growth, y-o-y EBITDA margins, Nordic Industrials

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10

ABB A tl as C op co Metso San dv ik Sca ni a Vol vo SKF Assa Abo lo y Autol iv Ves ta s

-5%

0%

5%

10%

15%

20%

25%

30%

AB B As saAbloy

AtlasCopco

Autoliv Metso NorskHydro

Sandvik Scania SKF Vestas Volvo

Q4-08 Q4-09 Q4-10

Source: Company reports, SEB Source: Company reports, SEB

Strong profitability improvementSector profitability continued to improve in Q4 010 due to a combination of effective costreductions last year and higher revenue although the improvement was smaller comparedwith previous quarters as cost cutting effects leveled off, raw material costs increased andnegative FX effects primarily due to the strong SEK. The sector is heavily exposed to rawmaterial prices, especially industrial metals and is also very sensitive to fluctuations in theSwedish krona against other large currencies including the US dollar and euro. While weexpect current high raw material costs to persist through the current year, we are confidentthat industrial companies will at least be able to mitigate the negative effect by raising pricesand volumes. We expect slow margin improvement in 011 as capacity utilisation willimprove and further, albeit limited, effects from cost cutting made in 009 and 010. Thesector should be able to meet strong demand without the need to make further largeinvestments in either production line capacity or labour. Although the sector hassuccessfully restructured operations and reduced expenses it may prove challenging forcompanies to maintain a strict cost regime as volumes improve, which could exert pressure

on profitability.Focus on growth both organic and inorganicFollowing a period in which companies have concentrated on reducing costs andstrengthening balance sheets in response to weak demand, most are now focusing moreaggressively on achieving both organic and inorganic growth. The next large sectortransaction is Assa Abloys proposed acquisition of Cardo for a total price of SEK 11.3bn. Theacquisition will result in a substantial increase in Assa Abloys leverage, a developmentwhich led S&P to put its ratings on the company on CreditWatch negative.

Increasing shareholder pressureStrong financial positions amongst Industrials together with a robust economic reboundhave begun to result in increasing shareholder pressure on companies to adopt more

aggressive financial policies. Proposed 010 sector dividends will increase by almost 10%compared with 009 which is hardly surprising as the industrial sector cut dividends themost in 009. However, we expect companies to act cautiously and protect their current


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credit ratings when considering large debt funded acquisitions and aggressive returns toshareholders. This is particularly the case as access to capital markets is increasinglyimportant as banks struggle with higher funding costs and regulatory issues. Most industrialcompanies also have very strong balance sheets and sufficient headroom within currentratings to make further acquisitions. An example of a company protecting its credit rating isAssa Abloy which has decided to propose a lower-than-expected dividend following its largeacquisition of Cardo in an attempt to avoid being downgraded.

Proposed dividend change per sector 2010 vs. 2009

0%

20%

40%

60%

80%

100%

120%

140%

Industrials

Telecom

Financialinstitutions

Consumer&other

Utility&energy

Pulp&paper

Total

Source: Company reports, SEB

Strong order intake implying further sales growthOrder growth continued to develop strongly during the fourth quarter while the pace ofgrowth eased slightly. Volvo and Scania reported the strongest increases after being worstaffected by the downturn. In addition, late cyclical ABB has begun to report a recovery inorder intake. Most companies reporting order intake data achieved an order to sales ratio ofat least 1.0x, implying further sales growth during 011.

Industrial order intake, % change y-o-y Truck order intake, % change y-o-y

-50%

-30%

-10%

10%

30%

50%

70%

Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10

ABB Atlas Copco Sandvik Metso

-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10

Scania Volvo

2068%



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Credit quality back at pre-crisis levelsCompanies have continued to focus on maintaining strong balance sheets, using excesscash to repay debt or strengthen cash reserves. The vast majority of industrials havereduced their net debt significantly since the end of Q3 009 due to strong cash flowgeneration. In terms of debt multiples, net debt to EBITDA improved for all sector

companies except Norsk Hydro (which retains a substantial net cash position) and SKF (dueto its acquisition of Lincoln International) compared with Q3 010 reflecting better earningsand strong cash flow generation. At the same time, credit quality among industrials hasreturned to pre-crisis levels.

Order to sales, Nordic Industrials Net debt to EBITDA, Nordic Industrials

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Q1-

07

Q2-

07

Q3-

07

Q4-

07

Q1-

08

Q2-

08

Q3-

08

Q4-

08

Q1-

09

Q2-

09

Q3-

09

Q4-

09

Q1-

10

Q2-

10

Q3-

10

Q4-

10

ABB Atlas Copco Metso Sandvik

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

ABB

AssaAbloy

AtlasCopco

Autoliv

Metso

NorskH

ydro

Sandvik

Scania

SKF

Vestas

Volvo

Q2-10 Q3-10 Q4-10


Relative value, Nordic industrialsNordic industrials are in general tightly priced although we believe some additional spreadtightening potential to be found in Volvos bonds, especially in the longer maturities, as thecompany should continue to improve its profitability further this year. Even though Vestasbond is trading at attractive levels relative to peers, we advise investors to be cautious interms of adding exposure due to a weak company outlook with higher investment levels andindustry overcapacity negatively affecting cash flow generation this year. Maersk is alsotrading slightly wider compared to peers due to the lack of a public rating and a highexposure to shipping and energy. We still find the companys bonds attractive on a relativebasis as the company now enjoys a very strong financial position and a streamlined costposition. We also believe Metsos 014 bonds offer value compared to the 014 bonds ofsimilarly rated peer Sandvik.


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Relative value, Nordic Industrials

Investor 4.875

Maersk 4.38

Swedish Match 3.875

Carlsberg 3.375

Volvo 5.0

Investor 4.0

Vestas 4.625

Maersk 4.875Metso 7.25

Atlas Copco 4.75

Carlsberg 6.0

Volvo 9.875

Sandvik 6.875

SKF 4.25

Swedish Match 4.625

ABB 4.625

Securitas 6.5

Volvo 7.875

Investor 6.125

0

20

40

60

80

100

120

140

160

180

200

220

0.0 2.0 4.0 6.0 8.0 10.0 12.0

Years-to-maturity

ASWspread



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3


Oil & Gas Benefits from a higher oil priceRecently, the oil price has increased sharply due to unrest in the Middle East and concernsthat the present turmoil in Libya may spread to more major oil producing countries (i.e. Iran,Saudi Arabia and to some extent Algeria). However, the oil price increase has also benefitedfrom more fundamental factors including increased economic growth. It is important to

remember that because the oil market depends heavily on politically unstable parts of theworld, political risk is effectively a constant factor in determining its price. In any case, thehigher oil price will benefit upstream operations within an integrated oil sector and E&Psmore focused on oil than natural gas. Consequently, many companies are likely to reportsolid Q1-11 results.

So far this quarter, the oil price has averaged USD 100/bbl, an increase of 34% over thecorresponding period last year. An upward trend has been seen since August 010, withanalyst consensus now expecting an oil price of around USD 95/bbl for 011 (up from USD85/bbl in December 011), albeit still lower than forward contract prices in the market ofaround USD 110/bbl for 011. While the high oil price will benefit cash flow of oil producers,companies will in the longer term still face pressure to increase production and expand their

reserves. As a result, we expect unconventional sources (including shale gas basins, oilsands and gas-to-liquid projects) to attract increased interest, as they become far moreeconomical whenever crude prices are high.

In the case of Statoil, for example, a higher oil price is positive as the company intends toincrease its capex, exploration expenses and dividends this year. Based on these estimatedcash outflows and an USD 80/bbl after tax oil price forecast by management, operating freecash flow would be negative in 011 (if we exclude the sales proceeds from oil sand projectKai Kos Dehseh and the Peregrino transaction). However, with an oil price above USD100/bbl and cash proceeds from asset sales in 011, operating free cash flow will be muchmore positive than first anticipated.

CDS pricing development

In early January 011, BPs 5yr CDS started trading tighter than ENI after peaking as high as+614bps in mid-June 010. It still trade at a spread premium to the best in class (i.e. Total,Statoil and Shell, all of which have CDS currently trading around 50-60bps), which webelieve it should do for some time. We also note that Statoils EUR bonds are still tightlypriced compared to the companys CDS curve, but the basis is in line with the historicalaverage the last year.

Oil majors - 5yr CDS development Statoil Relative Value

0

50

100

150

200

250

300

350

Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11

StatoilHydro Aa2/AA- BP A2/A ENI Aa3/A+ Total Aa1/AA

Stoil 5.625 Mar 2021

Stoil 4.375 Mar 2015

0

10

20

30

40

50

60

70

80

0 1 2 3 4 5 6 7 8 9 10 11 12

Years to maturity

Z-spread

Source: SEB , Markit Source: SEB , Bloomberg


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Pulp and paperIMPROVING PRICE MOMENTUM

The 011 outlook for the pulp & paper sector looks promising. Although structural issuessuch as overcapacity will persist in some paper grades and the shift to digital media has

been more accentuated with the introduction of tablets such as the iPad, price momentumfor publication paper appears attractive. There are signs from the annual newsprint contractnegotiations that year-on-year increases will be around 15-0%. While not all discussionshave been finalised we expect price increases of at least 15%, and hopefully more. Recently,magazine paper prices have increased by 6-9% driven by a recovery in advertising spendingwhile packaging prices, having already recovered last year, have stabilised at a high level.

Raw material costs pressure profitabilityNegatively, increasing costs for raw materials such as wood, fibre, energy and chemicals willcontinue to exert pressure on sector profitability in 011 especially for producers with lowvertical integration. Nevertheless, we believe improving volumes and prices together withcost cutting will offset high raw material costs this year. In addition, we expect gradualearnings increases for well-diversified producers and packaging paper companies in linewith strong industrial production. M-real and Stora Enso will continue to improve earningssupported by robust demand for packaging products while UPM will benefit most fromhigher publication paper prices and its own superior cost position. However, we fear thatNorske Skogs profitability will deteriorate further in 011 as rising raw material costs willmore than offset the positive effects of higher newsprint and magazine paper prices giventhe companys low self sufficiency.

Continued focus on cash flow preservationThis year, the sector will continue to focus on cash flow preservation by maintaining a strictcapex regime. While we foresee slightly higher investments after low recessionaryexpenditure, overcapacity still persists in various paper grades, limiting the need for largeincreases in capital investments. Slightly improving earnings together with moderate capexspending should result in a continued improvement in credit quality this year for most sectorcompanies.

Newsprint prices Pulp and recovered paper prices

400

450

500

550

600

650

Jun-01 Aug-02 Oct-03 Jan-05 Mar-06 May-07 Jul -08 Sep-09 Nov-10

400

450

500

550

600

650

700

750

800

Newsprint (EUR/tonne) Newsprint (USD/tonne)

400

500

600

700

800

900

1000

Apr-04 Nov-04Jun-05 Jan-06Aug-06 Mar-07 Oct-07May-08Dec-08 Jul-09 Feb-10Aug-10

30

50

70

90

110

130

150

Pulp (NBSK) Recovered paper

Source: FOEX, SEB Source: FOEX, SEB

All companies within the sector except Holmen reported slightly weaker year-on-yearprofitability in Q4 as improving volumes and prices failed to offset higher prices for wood,fibre, energy and recovered paper. Despite weaker earnings, Stora Enso and UPM reportedslightly lower leverage due to strong cash flow generation attributable to efficient workingcapital management and decreased capex. Credit metrics for Norske Skog and M-real

weakened due to lower earnings.


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EBITDA margins, Pulp and paper Net debt to EBITDA, Pulp and paper

0%

5%

10%

15%

20%

25%

Holmen M-real Norske Skog SCA Stora Enso UPM

Q4-08 Q4-09 Q4-10

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Holmen M-real Norske Skog SCA Stora Enso UPM

Q2-10 Q3-10 Q4-10


Long awaited consolidation in publication paperIn December, UPM announced its intention to acquire Finnish publication paper producer

Myllykoski and Rhein Papier for EUR 900m. The transaction will be financed by EUR 800m innew debt and a share issue of five million UPM shares. In March, UPM said the targeted timeof the closing of the Myllykoski transaction has been postponed to Q3 011 as the EUCommission is opening an in-depth probe of the acquisition. In our opinion, the Myllykoskideal represents a very positive fit for UPM on both a geographical and product basis and willresult in substantial synergy effects exceeding EUR 100m mainly from 01, improvingcompany profitability. UPMs publication paper market share will also increase to 9% from% improving its pricing power. The transaction will have a positive cash flow effect uponcompletion. In addition, the acquisition will be strongly positive for the pulp & paper sectorby improving the capacity balance within the publication paper sector as UPM will closedown unprofitable capacity. The relative winner in the sector apart from UPM will be StoraEnso (magazine paper: 1% of sales) and Norske Skog (34%). We maintain our view of UPMas a BB+ credit with stable outlook. While the proposed acquisition of Myllykoski will resultin slightly increased leverage, potential cost savings are substantial resulting in improvedprofitability. In our opinion, UPMs credit ratings should be maintained despite increasedleverage although the headroom for further debt financed acquisitions remains very limited.


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Relative value, Nordic pulp & paper

M-real 9.25

Norske Skog 7.0

Stora Enso 5.125

0

100

200

300

400

500

600

700

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Years-to-maturity

ASWspread

7.0


Relative value, Pulp & paperWe still see potential in M-reals bond as the company should continued to improve itsprofitability during 011 through a strong performance in its packaging division. We alsoexpect M-real to continue to

seb report: high yield still our preferred choice

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