Nordea On Your Mind: The financial flak vest
Nordea's latest 'On Your Mind' report, 'The financial flak vest,' updates their 2019 'life jacket' analysis, arguing that while Nordic public finances are robust, household leverage and specific corporate segments—particularly real estate and private equity—pose risks from higher rates. Per the full note , Nordic large corporates maintain lower net debt/EBITDA (1.05x) than historical averages, but financial sponsors carry senior debt/EBITDA of 4.2x, warranting attention. The report notes funding costs have risen to 2009-11 levels, with investment-grade spreads at 3.1% and high-yield at 6.4%, though systemic leverage fears are overblown. Without internal coverage or upcoming calendar events, the desk's focus remains on sector-specific risks rather than macro FX trends.
What the desk is arguing
Nordea's research team frames the current corporate funding environment as requiring a 'flak vest' rather than a 'life jacket,' signaling heightened protection needs amid turbulence. The report argues that Nordic corporate leverage is not a systemic problem, with aggregate net debt/EBITDA at 1.05x—below the 2006-19 average of 1.28x—but highlights pockets of stress in real estate and private equity.
Specific data points from the source include that roughly 20% of Nordic large corporate loan volumes over the past five years came from financial sponsors, where senior debt/EBITDA averaged 4.2x. Additionally, funding costs have risen from near-zero for IG and ~2% for HY in late 2021 to 3.1% and 6.4%, respectively, returning to 2009-11 levels.
The alternative read—that Nordic corporates face a broad refinancing crunch—is implicitly rejected by the evidence showing low aggregate leverage. The report instead emphasizes that the risk is concentrated in highly leveraged segments, not the wider corporate universe.
Key takeaways
- 01Nordic corporate leverage is low by international standards, but real estate and private equity exhibit elevated risk.
- 02Financial sponsors carry senior debt/EBITDA of 4.2x vs. 1.05x for general corporates, warranting monitoring.
- 03Funding costs have risen to 2009-11 levels but remain manageable for most firms given low leverage.
- 04The 'flak vest' metaphor underscores need for targeted protection, not systemic alarm.
Market implications
Watch for widening credit spreads in Nordic real estate and private equity as rate hikes continue to feed through. The lack of a macro FX catalyst suggests focus on sector-specific bond and equity performance rather than broad currency moves.
Risks to this view
A sharper-than-expected economic downturn could expose leverage in the broader corporate sector, invalidating the benign aggregate view. Alternatively, if central banks pivot to cuts sooner, funding cost relief could mask underlying vulnerabilities in real estate and sponsor-backed firms.
Nordea On Your Mind Nordea On Your Mind: The financial flak vest 14-03-2023 Is there a leverage problem in the Nordic region? Will higher interest rates be a source of pain for corporates going forward? Our Nordea On Your Mind team returns to the theme of corporate funding in their latest report, “The financial flak vest.” Back in 2019, the Nordea On Your Mind team released a report called “The financial life jacket,” exploring the state of corporate funding at the time.
Now, the team revisits the theme in their latest report. Only this time, they’ve replaced the life jacket metaphor with a flak vest, referring to the heavy, reinforced jacket often used for protection in war zones. The title reflects the heightened need for protection from a corporate funding perspective, given today’s turbulent market environment.
Leverage is a greater challenge for households By international comparison, Nordic public finances are very strong, both state budget balances and debt. The potential leverage challenge lies with Nordic households, whose debt to disposable income levels are very high. Nordic large corporates have lower leverage than in Asia, North America or Europe, and actually even lower recent net debt to EBITDA (1.05x) than the 2006-19 historical average (1.28x).
Nordic corporate leverage is unlikely to become a general problem, but may need some attention in segments such as real estate and private equity. As an illustration, roughly 20% of total Nordic large corporate loan volumes in the past five years have been represented by financial sponsors, which had an average senior debt to EBITDA ratio of 4.2x – far above that of general corporates. Interest rates have not been a major issue, but...
Over the past year, corporate funding costs have risen to 2009-11 levels, owing to both rising policy interest rates and widening credit spreads. From lows in late 2021 of around 0% for investment grade, and ~2% for high-yield, funding costs have climbed to 3.1% and 6.4%, respectively. Our analysis shows that debt service costs for large corporates were roughly 200 bp lower in 2020-22 than 2007-19.
Should these higher funding costs persist, they would reduce global EBITDA by ~4%, but only ~1% in the Nordic region, which has lower leverage. Looking at global sectors, we find that real estate and utilities would be the worst hit, with 14% and 8% lower EBITDA, respectively, all else being equal. A rude awakening A buoyant market environment and some powerful structural drivers made Nordic corporate bond issuance grow to an average of EUR 45bn per year in 2012-22, almost triple the level of the prior decade.
Soaring inflation and interest rates, paired with risk aversion, reduced issuance by roughly EUR 10bn in 2022, reminding borrowers that bond demand can vary significantly. For example, there was virtually zero issuance of rated Nordic local currency high-yield bonds in 2021-22. There will be bond maturities of EUR 40-45bn per year in 2023-26E; if all of those were to be refinanced in the bond market, it would require annual new issuance more or less on a par with the strong average of the past decade.
This could be particularly challenging, since more than half of all bond maturities during the period are unrated or high-yield. We offer borrowers similar advice as in 2019 In our 2019 report, The financial life jacket, we encouraged corporate borrowers to not assume that the buoyant debt capital market was a 'new normal', which has proven to be true. We again emphasise the importance of diversifying potential funding sources and managing maturity profiles and interest rate risks, which have become meaningful again for many companies.
With Basel IV bank regulations to be implemented from 2025, credit profiles and credit ratings will for large corporates create even more of a watershed for availability and cost of funding than in the past. Corporate and Nordea expert views We interview Outokumpu CFO Pia Aaltonen-Forsell and Stena AB Finance Director Peter Claesson about their respective funding and leverage views and journeys in recent years. We also turn to Nordea's Head of Large Corporates & Institutions Norway Morten Ristvedt , and Head of Debt Solutions & Structuring Lars Fischer , for high-level perspectives on the evolution of the Nordic funding market environment and corporate options.
Nordea On Your Mind is the flagship publication of Nordea Investment Banking’s Thematics team, which produces research for large corporate and institutional clients. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance. Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year.
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