Nordic Manager of $7 Billion Is Staying Away From Unrated Bonds

(Bloomberg) -- When volatility comes back, unrated bonds in the Nordic market will be harder hit than those with credit assessments, according to asset manager Alfred Berg.

“I feel comfortable with a high share of rating in the portfolio,” Morten Steinsland, the head of fixed income at the Oslo-based manager, said in an interview. “They are companies that will fare better than unrated companies.”

Nordic shadow ratings, or ratings provided by credit analysts at banks, were a cornerstone of the region's corporate debt market, allowing smaller issuers to sell debt at a lower cost. The practice disappeared in 2016 after the European Securities and Markets Authority decided that only registered rating companies, like Fitch, Moody's and S&P, can give ratings. But there's still no discrimination between unrated and rated issuers, said Steinsland, who oversees about 55 billion kroner ($7 billion).

“I'm pretty sure it will come -- when there's less supply of capital it will materialize,” he said. “There's so much money out there chasing a rather small amount of papers, but it's not certain it will be like that in the coming years. The ones who have an rating will have it easier getting money in tighter times.”

Steinsland is preparing for more volatility as central banks roll back quantitative easing and raise interest rates. Investors should be “extra focused” on avoiding any imbalances in the portfolio, Steinsland said.

“You should always have a robust portfolio,” he said. “Then it's more or less important to give gas or put on the brakes. Right now we think it's correct to put on the brakes. Not hard but gently.”

That means being well diversified and having a low concentration of unsecured and illiquid bonds. Steinsland is looking at increasing the share of covered bonds and municipal bonds and he's cautious on real estate bonds in Norway and Sweden. The Nordic Investment Grade fund has returned 2.9 percent in the past year.

While his base case is that the central banks will control a smooth transition to less liquidity and higher interest rates, Steinsland sees a 20 percent to 30 percent chance for “more wild movements” than now.

“There's a pretty high probability for a situation where there are more abrupt and volatile movements,” he said. “Where the liquidity breaks the sentiment in the market.”

To contact the reporter on this story: Jonas Cho Walsgard in Oslo at jchowalsgard@bloomberg.net.

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Stephen Treloar

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