Investment Research 17 October 2014 Weekly Credit Update Headlines Contents  A tale of two asset classes – decoupling   Market commentary 1 Fear index on the rise Selected charts 2 US reporting season kicks off on a good note Recently published research 4 Official and shadow ratings 6 Market commentary During recent weeks we have seen a decoupling between investment grade and high yield, with the latter highly correlated with equity markets (especially deep high yield instruments) while investment grade has been something of a sweet spot. Risk appetite has fallen dramatically in high yield/equities and as government bonds offer yields close to nothing, investor attention has turned to investment grade bonds which have – although still under pressure – performed relatively well. The iTraxx main has widened 4bp this week and the Crossover by 25bp and the indices are currently trading at 74bp and 392bp, respectively. The negative sentiment over the past month has moved between gradual increases in risk aversion and full-scale panic mode and this week has been no exception: there was relative calm at the beginning of the week, panic mid-week and an apparent return to calm the end of the week. Despite today’s seemingly risk-on mode (driven by dovish comments from the Fed yesterday and some technical support in equity markets), we still believe volatility will remain high in the coming weeks. VIX index – 10Y history 90 VIX index since January 2013 30 VIX index VIX index 80 70 60 iTraxx Europe (investment grade) bp 250 200 150 100 50 0 maj-11 nov-11 maj-12 nov-12 maj-13 nov-13 maj-14 Source: Bloomberg, Danske Bank Markets iTraxx Crossover (high yield) 1,200 bp 1,000 25 800 20 600 50 15 40 30 10 20 200 5 10 0 okt2004 400 okt2005 okt2006 okt2007 okt2008 okt2009 Source: Danske Bank Markets okt2010 okt2011 okt2012 okt2013 0 jan-2013 apr-2013 jul-2013 okt-2013 jan-2014 apr-2014 jul-2014 okt-2014 Source: Danske Bank Markets 0 maj-11 nov-11 maj-12 nov-12 maj-13 nov-13 Source: Bloomberg, Danske Bank Markets That said, the ‘fear’ VIX index is currently not at an alarming level despite the pick-up in recent weeks (see charts above). So while we believe the current sentiment will remain for a while, we also believe that central bank initiatives combined with a relatively strong US outlook in the medium term and our belief that Germany has surprised on the downside mainly for seasonal reasons suggest we should not be overly concerned. The US earnings season has started on a positive note and while only a small number of companies have reported so far, it can be a catalyst for the re-emergence of risk appetite. In Europe, SKF presented a slightly disappointing Q3 result. SKF is often an indicator of the health of European companies and the results points to further decoupling between the US and Europe. Important disclosures and certifications are contained from page 9 of this report Chief Analyst Thomas Hovard +45 45 12 85 05 [email protected] www.danskeresearch.com maj-14 Weekly Credit Update Last Friday night (10 October 2014), S&P downgraded Finland’s rating from ‘AAA’ to ‘AA+’ citing the weak Finnish economy weighed by a struggling tech and forest sector, coupled with a declining workforce and negative spill-overs from its large trading partner Russia. As a direct consequence of Finland’s rating cut, Fingrid (Buy) was downgraded from ‘AA-’ to ‘A+’ on Wednesday. Following the rating cut, Fingrid now only receives one notch for government support as opposed to two previously. Fingrid’s outlook was changed from negative to stable. Primary markets have almost been closed over the past week due to the turmoil. 2| 17 October 2014 www.danskeresearch.com 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| 17 October 2014 www.danskeresearch.com Weekly Credit Update Europe fund flows Sweden fund flows Norway fund flows Source: Macrobond Source: Macrobond Source: Macrobond 4| 17 October 2014 www.danskeresearch.com Weekly Credit Update Recently published research Getinge We have had a negative outlook on our ‘BBB-’ credit view on Getinge since the spring, with an expectation of the company gradually reducing its leverage towards 3x. With no signs of sales or margins picking up in the near term, we now see only limited potential for debt reduction. We expect net debt to EBITDA to remain at a level of 3.5-4.0x (at best) in the coming quarters. As we do not view this level of leverage as commensurate with an investment grade rating, we downgrade our credit view on Getinge to ‘BB+’. With a conclusion pending of FDA’s review towards year-end, of which the outcome is uncertain, the outlook on our credit view remains negative. MSE Sweden-based Mjölby Svartådalen Energi (MSE) is a multi-utility producer with strong ownership: 55% owned by Mjölby municipality (Mjölby kommun), 35% owned by Tekniska Verken Linköping (owned by Linköping municipality (Linköping kommun) and 10% owned by Motala municipality (Motala kommun). Due to the investment in a new combined heating and power (CHP) plant and consequent increase in leverage, we lower our credit view on the company from ‘BBB+’ to ‘BBB-’. Our credit view includes two notches of uplift from the company’s stand-alone credit profile due to the owners’ demonstrated strong support. At the same time, as we do not expect MSE to be active in capital markets going forward, we have decided to drop our coverage on the name. SKF – Q3 14 SKF presented a slightly disappointing Q3 14 result. Overall revenues grew about 14% y/y but most of this growth was derived from M&A (Kaydon) and FX (weakening SEK). Volumes grew by 1.9% y/y (versus c4% y/y in Q2). We were expecting deleveraging in the quarter but adjusted net debt grew as a result of an increase in pension liabilities of cSEK2bn, which largely offset an otherwise strong cash flow from operations. In our view, the balance sheet is stretched for the rating and we downgrade our recommendation from Hold to Sell. Fingrid S&P downgraded the Finnish transmission system operator Fingrid to ‘A+’ from ‘AA-’. This follows the downgrade of the republic of Finland on 10 October from ‘AAA’ to ‘AA+’. Fingrid’s outlook was also upgraded from ‘negative’ to ‘stable’. The downgrade was well flagged by S&P and should not have taken the market by surprise. We maintain our Buy recommendation on Fingrid as its bond is trading wide relative to the Utilities ‘A’ curve. 5| 17 October 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 BBBStable 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 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+ 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 Stable BBFingrid Oyj Finnair Oyj BB Stable Fortum Oyj Fortum Varme Holding Samagt Med Stockholms Stad Ab Fred Olsen Energy Asa BB+ Stable G4S Plc Getinge Ab BBBNeg Heimstaden Ab BB Stable BBHelgeland Sparebank Hemso Fastighets Ab BBB+ Stable Hoist Kredit Ab BBStable B+ Husqvarna Ab BBBStable 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 Mjolby-Svartadalen Energi Ab BBB+ Watch 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 Prosafe Se BB 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 A Neg Baa1 Pos Fitch Rating Outlook BBB Stable A Stable A+ BBB+ Stable Stable A1 Baa1 Neg Stable BBB BBB Pos Wr Baa2 Stable AA- Neg A1 Stable A+ Stable ABBB+ Neg Stable A2 Neg A- Neg BBB- Stable BBB+ Stable WD Baa2 Neg AABBB- Stable Stable A1 Baa3 Stable Stable A- Stable Baa1 Neg B+ BBB Pos Stable B2 Baa2 Pos Neg BB Pos Ba2 Stable BB Stable AA- Neg Aa3 Neg AA- Stable A+ Neg Baa2U Stable A Stable AA- Neg Aa3 Neg A+ Stable Analyst(s) Mads Rosendal Wiveca Swarting Jakob Magnussen Brian Børsting Mads Rosendal Mads Rosendal Åse Haagensen T. Hovard / L. Holm Øyvind Mossige Øyvind Mossige Mads Rosendal Brian Børsting Knut-Ivar Bakken Åse Haagensen Åse Haagensen 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 Åse Haagensen Åse Haagensen Jakob Magnussen Brian Børsting Jakob Magnussen Jakob Magnussen Sondre Stormyr Brian Børsting Louis Landeman Wiveca Swarting T. Hovard / L. Holm Wiveca Swarting Gabriel Bergin Louis Landeman Brian Børsting Brian Børsting Åse Haagensen Gabriel Bergin Thomas M. Hovard Mads Rosendal Bjørn Kristian Røed Louis Landeman Mads Rosendal Mads Rosendal Louis Landeman Wiveca Swarting Jakob Magnussen Ola Heldal Jakob Magnussen T. Hovard / L. Holm Sondre Stormyr Brian Børsting Åse Haagensen T. Hovard / L. Holm Jakob Magnussen Bjørn Kristian Røed Åse Haagensen Åse Haagensen Åse Haagensen Mads Rosendal T. Hovard / L. Holm Åse Haagensen Gabriel Bergin Åse Haagensen Source: Standard & Poor’s, Moody’s, Fitch, Danske Bank Markets 6| 17 October 2014 www.danskeresearch.com Recomm. BUY SELL HOLD SELL HOLD HOLD HOLD BUY BUY SELL BUY BUY HOLD BUY BUY HOLD HOLD SELL BUY SELL Weekly Credit Update Ratings from Standard & Poor’s, Moody’s and Fitch and Danske Bank markets shadow ratings Company 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 Talvivaara Mining Co Plc 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+ BBB+ BBB+ BBB BB+ Danske Bank Outlook Sr. Unsec Stable Stable Stable Stable Stable BBBBB+ A- Stable Stable Stable Wr Baa2 Stable Fitch Rating Outlook BBB BA A- Stable Stable Neg Stable Wr A2 Pos Neg BBB A+ Stable Neg Wr A1 Neg BBB+ Stable Baa1 Stable A2 A2 A2 Neg Neg Neg BB A+ Pos B+ A AA- Stable Stable Stable Stable Stable BBB+ Stable BBBB+ Neg 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 Neg 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+ AABBB Stable Pos Stable Neg Baa1 A3 A3 Wr Stable Stable Stable BBB+ Neg ABBB Stable Stable BB Pos Ba1 Stable WD A- Stable A3 Stable A- Neg BBB Neg Baa2 Neg BBB Stable BB Stable BB C Stable BB- BBBBB Stable Stable B+ BBB+ BBB+ Stable Stable BBB+ Stable BBBBBB- Pos Stable B Neg Analyst(s) Brian Børsting Wiveca Swarting T. Hovard / L. Holm T. Hovard / L. Holm Mads Rosendal Brian Børsting T. Hovard / L. Holm Mads Rosendal Åse Haagensen Sondre Stormyr Brian Børsting T. Hovard / L. Holm Wiveca Swarting Mads Rosendal Åse Haagensen T. Hovard / L. Holm Lars Holm T. Hovard / L. Holm T. Hovard / L. Holm T. Hovard / L. Holm Wiveca Swarting Jakob Magnussen Jakob Magnussen Jakob Magnussen Jakob Magnussen Åse Haagensen 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 Mads Rosendal Ola Heldal Bjørn Kristian Røed Ola Heldal Ola Heldal Ola Heldal Ola Heldal Jakob Magnussen Åse Haagensen Ola Heldal Mads Rosendal Wiveca Swarting Jakob Magnussen Niklas Ripa Bjørn Kristian Røed Mads Rosendal Louis Landeman Source: Standard & Poor’s, Moody’s, Fitch, Danske Bank Markets 7| 17 October 2014 www.danskeresearch.com Recomm. HOLD HOLD HOLD HOLD HOLD BUY HOLD 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 [email protected] Louis Landeman TMT, Industrials (+46) 8 568 80524 [email protected] Åse Haagensen High Yield, Industrials (+47) 22 86 13 22 [email protected] Mads Rosendal Industrials, Pulp & Paper (+45) 45 14 88 79 [email protected] Jakob Magnussen Utilities, Energy (+45) 45 12 85 03 [email protected] Brian Børsting Industrials (+45) 45 12 85 19 [email protected] Gabriel Bergin Strategy, Industrials (+46) 8 568 80602 [email protected] Niklas Ripa High Yield, Industrials (+45) 45 12 80 47 [email protected] Bjørn Kristian Røed Shipping (+47) 85 40 70 72 [email protected] Ola Heldal TMT (+47) 85408433 [email protected] Wiveca Swarting Real Estate, Construction (+46) 8 568 80617 [email protected] Sondre Dale Stormyr Offshore rigs (+47) 85 40 70 70 [email protected] Henrik René Andresen Credit Portfolios (+45) 45 13 33 27 [email protected] Øyvind Mossige Oil services (+47) 85 40 54 91 [email protected] Knut-Ivar Bakken Fish farming (+47) 85 40 70 74 [email protected] Lars Holm Financials (+45) 45 12 80 41 [email protected] Find the latest Credit Research Danske Bank Markets: http://www.danskebank.com/danskemarketsresearch 8| 17 October 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’). 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