Party over for cheap and ample corporate funding
The key takeaway from Nordea's latest analysis is that the favorable conditions for cheap corporate funding in the Nordic region are rapidly dissipating, largely due to inflation and rising interest rates. As highlighted in the podcast featuring Johan Trocmé and Viktor Sonebäck, the trend of bonds replacing traditional bank funding—effective over the past decade—is reversing, impacting corporate cash flows significantly. This development necessitates a reevaluation of financing strategies among corporates, especially as leverage levels may pose risks in the current climate. Per the full note source, it is essential for market participants to anticipate the implications of tighter funding on corporate stability when positioning themselves in FX markets.
What the desk is arguing
The deterioration of corporate funding conditions suggests a paradigm shift that FX traders should acknowledge. The discussion points to a reversal of a long-standing trend driven by affordability of bonds as an alternative to bank funding. Specifically, the increasing costs of capital are expected to strain corporate cash flows, compelling organizations to reconsider their reliance on market finance, as emphasized by Nordea's experts.
Data from the podcast indicates that corporates must now calculate how much rising funding costs will cut into existing cash flows, with a particular focus on the sustainability of leverage in the Nordic markets. This shift in corporate financing dynamics brings unpredictability to future refinancing of bond maturities, heightening credit risks in the region.
Where it sits in our coverage
While we currently lack internal FX coverage for relevant currency pairs, this commentary underscores broader market anxieties that could reverberate through the EUR/NOK and EUR/SEK pairs, as firms in those areas grapple with shifting funding landscapes.
How other firms see it
At this juncture, jpmorgan is aligned with the view presented by Nordea and recently set a target reflecting these concerns regarding corporate funding costs. Conversely, bofa adopts a more cautious view about the sustainability of this tightening trend, predicting more conservative outcomes for corporate leverage and funding costs.
Key currency pairs to watch in this evolving narrative include EUR/NOK and EUR/SEK, as they are likely to reflect changing investor sentiments regarding Nordic corporate health and funding availability.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Nordea signals the end of an era of cheap corporate funding in the Nordic region due to rising interest rates.
- 02Corporates are expected to face significant cash flow pressures from the increased cost of capital.
- 03The reliance on bond markets is likely to reverse, impacting refinancing strategies for corporate debt.
- 04Market participants must be vigilant about the implications of these shifts for currency positioning.
Market implications
Traders should focus on the EUR/NOK and EUR/SEK pairs as indicators of market sentiment related to Nordic corporate health. The potential for increased volatility in these currencies suggests readiness for swift adjustments in positioning as corporate funding conditions tighten.
Risks to this view
A notable risk to this outlook includes a rapid shift in monetary policy that could unexpectedly ease conditions for corporate funding. If central banks pivot toward a more dovish stance or if inflation levels stabilize, it could mitigate the anticipated pressures on cash flows and corporate leverage, prompting a reassessment of the current FX positioning.
Podcast Party over for cheap and ample corporate funding 22-03-2023 The Nordea On Your Mind team takes a deep dive into corporate funding in their latest podcast. Picking up from an earlier Nordea On Your Mind report in 2019, Johan Trocmé and Viktor Sonebäck talk in this podcast about the inflation and interest rate shock in 2022 starting to reverse the decade-long trend of bonds replacing bank funding for Nordic large corporates. Is leverage a problem in the Nordic region?
For all types of borrowers? How much could higher funding costs eat into corporate cash flows? Can bond maturities in the coming years be refinanced?
Their advice from 2019 is even more valid today. Read more: The financial flak vest We wanted to show you a Spotify but you cannot see it as you have not enabled cookies Click here to update your consent 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. The publication’s themes vary widely, and many are selected from suggestions by clients. Examples of covered topics include artificial intelligence, wage inflation, M&A, e-commerce, income inequality, ESG, cybersecurity and corporate leverage.
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