Nordic Bonds - a new financing alternative
A special form of corporate bond similar to high yield bonds, Nordic bonds are well established as financing instruments in the Scandinavian countries. Largely standardized documentation has been developed for these bonds, which are usually governed by Norwegian or Swedish law. The bonds tap into a new pool of investors, concentrated in Scandinavia. While high yield bonds are predominantly fixed-rate, Nordic bonds usually have a floating coupon. They also have shorter maturities, usually between three and five years. Volumes are generally lower, too, typically in the double-digit to low triple-digit million range. Investors also expect security, especially for issuers with lower credit ratings.
Nordic bonds have been appearing on the German market for some time now. One reason for this development is that conventional corporate bonds issued by German SMEs (Mittelstandsanleihen) can be difficult to place on the market. In addition, issuers appreciate the relatively short time to market, the lighter documentation and, in particular, access to financially strong Scandinavian investors familiar with the instrument.
The documentation is provided in largely standardized form by Nordic Trustee, which acts as trustee for the bondholders in virtually all Nordic bond deals. Unlike a conventional corporate bond, there is no underwriting agreement, only an engagement letter with the banks. The engagement letter is supplemented by a declaration of completeness from the issuer containing the warranties otherwise typically found in an underwriting agreement. The due diligence process is largely the same as for corporate bonds. It consists in the main of written responses to a questionnaire and an exchange with the issuer's management. Investors place their orders using a standardized application form. The bond terms themselves are not drawn up until the placement has been completed on the basis of a previously agreed, detailed term sheet. Unlike conventional bonds, Nordic bond terms contain incurrence covenants similar to those in a high yield bond indenture. Compliance with these covenants is checked only in connection with specified events. In contrast to conventional high yield bonds, however, Nordic bonds often also have financial maintenance covenants. These covenants require the issuer to satisfy one or more financial ratios (e.g., net financial debt to EBITDA) on an ongoing basis. Nordic bond terms are particularly likely to include financial maintenance covenants when the issuer is below investment grade.
Nordic bonds are generally placed privately. The bonds are listed on an over-the-counter segment of the Oslo Stock Exchange or NASDAQ Nordic and, especially in the case of German issuers, the Frankfurt Stock Exchange. In principle, therefore, an offering of Nordic bonds does not require a prospectus. Among German issuers, however, the combination of a private placement with a public offering in Germany and Luxembourg is relatively widespread. In these cases, the issuer prepares a securities prospectus, which is approved by the CSSF in Luxembourg and notified to the German BaFin.
Assuming no prospectus is used, the bonds are marketed on the basis of a detailed term sheet and an investor presentation similar to a pilot fishing presentation. This presentation provides investors with an overview of the issuer's business activities and the associated risks, but for liability purposes is not to be classified as a prospectus-like document. The effort needed to create any required security interests, however, should not be underestimated, especially in the case of a complex group structure subject, in the case of a German issuer, to German law.
As with conventional corporate bonds, Nordic bonds can be issued as green bonds or sustainability-linked bonds. This structure is increasingly popular among investors and can facilitate marketing of the product. In this case, a Green Bond Framework — or, if the issuer is considering further green financing, a Green Finance Framework — must be prepared in addition to the other documents. Currently, the Green Bond Principles of the ICMA and the Climate Bond Standards of the Climate Bonds Initiative typically serve as the basis for these frameworks. To bolster credibility among investors, an outside expert assesses the framework and issues a third-party opinion. If a prospectus is prepared for the placement, the issuer must also include information in accordance with the recently published ESMA statement on ESG disclosures. The additional effort may well be worthwhile, given the growing importance of green financing and the positive effect it can have on the issuer's public image.
Authored by Prof. Dr Michael Schlitt, Dr Susanne Ries LL.M., and Mark Devlin.
