Eksportfinans' downgrade to junk by Moody's revives credit fears, sources say

By Emma Trincal

New York, Nov. 23 - The announcement that Eksportfinans ASA, the third-party issuer of structured notes, would be wound down following a downgrade to junk status by Moody's Investors Service caught the market off guard.

"The downgrade was completely unexpected and unpredicted by the markets. The impact will be far-reaching well beyond the structured products market, which was just a small fraction of its outstanding obligations," Keith Styrcula, chairman of the Structured Products Association, told Prospect News.

Downgrade to junk eyed

Moody's Investors Service downgraded the Oslo-based financial services company's issuer and senior debt ratings to Ba1 from Aa3 late Monday.

The rating action followed the Norwegian Government's decision on Friday to assume responsibility for the government-supported export credit scheme, Eksportfinans said on Tuesday.

On Wednesday, Eksportfinans announced that it will not provide new lending in its own name going forward with the exception of loans that were committed as of Nov. 18.

"Eksportfinans will retain its existing portfolio of loans, which will be managed by Eksportfinans until their respective contractual maturities," according to the release.

Monday's downgrade is occurring nearly a month after Moody's decision to downgrade Eksportfinans ASA's issuer and debt ratings to Aa3 from Aa1 on Oct. 28.

The October downgrade was based on the Norwegian Ministry of Finance's decision not to grant Eksportfinans a permanent exemption from the European Union's Capital Requirement Directive, meaning the company had to recapitalize in order to meet the directive.

The Norwegian government said the company and its largest shareholders were unable to agree on a recapitalization plan that would ensure adequate export financing.

Liquidity concerns

"Eksportfinans was a name banks with a low rating used in order to enhance the credit quality of the paper they sold to their customers. Instead of issuing the notes themselves they would use this third-party issuer that had a very good rating up to now," a structurer said.

"There is risk in using a third-party issuer, because liquidity is not as good as the original name."

In a note to investors on its website, Eksportfinans said it believes the company to be "well capitalized" and to have "good liquidity."

"Eksportfinans has every intention to honor all of its obligations as they come due," the company said in its press release.

Outstanding

"It's difficult to predict what the Norwegian government will do about the outstanding," said Styrcula.

From 2005 until 2011 as of Wednesday, Eksportfinans has issued $10.47 billion, out of which $2.67 billion are outstanding with the $7.80 billion balance having already matured, according to data compiled by Prospect News.

During the nearly six-year period, 2008 was the most active with 25% of the issuance occurring that year.

"Many people invested in the name for the good ratings. All of a sudden, it's cut to junk," the structurer said.

"This is just another sign of the credit crisis going on with the widening of credit spreads and the lower ratings. It's a bad situation."

Downward spiral risk

For many market participants, the question was whether the news would put jittery investors in panic selling mode.

"I think the instinct if you own Eksportfinans in your portfolio would be to sell sooner rather than later," said the market participant.

"But if I did own Eksportfinans, my inclination would be to hold on rather than to sell, based on the Norwegian government that owns 15%, and the fact that they think they'll manage an orderly wind-down.

"I think they are fully supported by the Government."

But even for investors resisting the urge to liquidate, the decision to sell may be unavoidable for some.

"It's still a concern for investors, especially those who can't hold below investment-grade debt. Then you'll have to be a seller," the market participant said.

"I'm sure investors are going to say 'Jeez what am I going to do now?'"

Top agents

According to data compiled by Prospect News, the top four agents who have used Eksportfinans in their offerings since 2005, in decreasing order of size, were the following:

• Goldman Sachs with $3,671 billion or 35% of the total issued during the period;

• Bank of America Merrill Lynch with $2.989 billion or 28.5%;

• Wells Fargo with $1.742 billion or 17%; and

• Morgan Stanley with $1.127 billion or 11%.

"Goldman and Merrill are the top ones who have sold that name. Both are not that involved in the third-party distribution space," said the market participant.

"But whoever the underwriter is, they'll have investors' skin in the game and they'll have to answer a lot of questions from their customers.

"I imagine that dealers about to settle will have to cancel obviously."

Everything is relative

Sources sought to put the negative headline news in perspective in the context of a bigger crisis.

"It's a bigger problem for the bond market in general, for the plain vanilla bonds than it is for structured products," the structurer said.

So far this year, the number of structured notes sold is $38 billion, excluding exchange-traded notes.

Out of this total, Eksportfinans issued $1.597 billion year to date, or 4.2%.

"The downgrade will have more of an impact in the supranational credit space than in the structured products market," the market participant said.

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