Anniversary Celebration of S&P Global’s Stockholm Ofﬁ...

30 Year Anniversary Celebration of S&P Global’s Stockholm Offi ceTuesday, 21 August 2018

30years inStockholm


30years inStockholm

1. Foreword

2. Regional Background

3. Meet Our Analytical Team

4. Depth and Breadth of Our Coverage

5. Published Research

• Sweden And Norway Are Set For Monetary Policy Tightening

• Nordic Corporates Aren’t Likely To Lose Their Taste For Capital Market Funding

• 2017 Inaugural Nordic Default Study And Rating Transitions

• Nordic Green Finance Looks Set For Sustainable Growth

• Can A Housing Market Crash Cripple Sweden’s Economy?

• Nordic Bank Ratings Continue To Stand Tall

• Nordic Corporates Are Still Powering Ahead

• Nordic Insurers: Digitalization Is A Key To Operational Efficiency

• Our Stress Tests Show Swedish LRGs To Be Vulnerable To Interest Rate Hikes

Contents

Foreword30 Year Anniversary Celebration of S&P Global’s Stockholm Office August 2018

The S&P Global Stockholm office is celebrating its 30-year anniversary in 2018

and I want to thank all our customers, staff, and other stakeholders for your

support throughout the years.

It is a privilege to serve our Nordic clients and we remain dedicated to our

role in nurturing Nordic capital markets’ growth by enhancing transparency,

delivering credit risk benchmarks, and providing analytical insights.

We continue to believe that our local analytical staff and our established

Nordic presence are critical to understanding local market nuances that

underscore our globally comparable benchmarks, which international

investors value. We believe our ratings support a level of confidence that

enables one party to provide resources to another, which is a crucial ingredient

for the overall effectiveness and growth of local capital markets.

Our commitment to our core values of relevance, excellence, and integrity

guides everything we do.

Regards

Andreas Kindahl

Andreas KindahlCountry Head of Nordics

From the past to the present

Our presence in the region stems from Sweden’s very active commercial paper (certifikat)

market in the late 1980’s, where Standard & Poor’s (S&P) issued ratings to support investors

in assessing credit risk. As a result, the Nordic short-term regional scale (k-scale) was born,

providing a ranking of issuers’ creditworthiness on a local rating scale. The years following our

office’s inception were very interesting and relatively turbulent because of the banking crisis

in Sweden, which began in 1990 and affected the country’s economy and financial markets

for several years.

Our rating agency began in 1988 as a joint venture between S&P and the Stockholm School

of Economics (SSE; Handelshögskolan), a leading business school in Sweden. Our first

employees were either SSE staff or graduates, some of which stayed with us for a very long

time. In the following years, S&P acquired the remaining stake from SSE and integrated the

Stockholm office fully into its network.

Today, we are S&P Global, and the office has 34 employees, of which 23 are analytical

staff. Our ratings activities encompass sectors such as banks, insurance, industrials,

infrastructure, sovereigns, and public finance. Our S&P Global Market Intelligence division

has six employees that provide end-to-end solutions for credit risk, and essential intelligence

to capital market participants.

Ratings add to capital market transparency, facilitate

benchmarking and credit risk discovery

Credit ratings play a useful role in enabling corporations and governments to raise money in

the capital markets. Instead of taking a loan from a bank, these entities sometimes borrow

money directly from investors by issuing bonds or notes. Investors purchase these debt

securities, such as municipal bonds, expecting to receive interest plus the return of their

principal. Credit ratings generally facilitate the process of issuing and purchasing bonds and

other debt issues by providing an efficient, widely recognized, and long-standing measure of

relative credit risk.

We have seen the establishment of regional offices of other established rating agencies

as well as the start-up of a local rating agency. We welcome the increased rating agency

presence, as a consequence of the increasing demand for transparency in the markets, which

we believe will contribute to further growth of capital markets.

Regional ratings growth demonstrates the importance of credit

risk benchmarks

The number of our ratings in the Nordic region has increased to about 220 across all sectors

at the end of July 2018, from about 175 at the end of 2014. Growth has mainly been in

the corporate sector, spread across several industries. Real estate companies represent

almost 20% of our new Nordic ratings since 2014. This is in line with what we predicted in

a 2012 publication (see “Tighter Bank Lending Prompts Nordic Companies To Rethink Their

Financing Options”, published on RatingsDirect on Sept. 12, 2012”), and reflects the growing

size of Nordic real estate companies and the price attractiveness of unsecured, long-term

debt compared with bank loans.

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Sweden Norway Denmark Finland Iceland

Nordic Rating Distribution (S&P) Per Country

Corporates Financial Sovereign and public finance

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AAA AA A BBB BB B CCC D

Nordic Rating Distribution (S&P) Per Rating Category

Public Confidential

Meet Our Analytical Team

Country Head of Nordics

Andreas Kindahl

Country Head of Nordics

[email protected]

Financial Services

Olivia Fleischmann

Associate Director

Banks

[email protected]

Pierre-Brice Hellsing

Associate Director

Banks

[email protected]

Simon Kristoferson

Associate Director

Insurance

[email protected]

Erik Andersson

Research Assistant

Insurance

[email protected]

Corporates

Thierry Guermann

Director

Telecoms

[email protected]

Per Karlsson

Director

Capital Goods

[email protected]

Edouard Okasmaa

Associate Director

Oil & Gas

[email protected]

Teresa Strömberg

Associate Director

Real Estate

[email protected]

Mikaela Hillman

Associate

Capital Goods

[email protected]

Sandra Wessman

Associate

Telecom

[email protected]

Ray Satagaj

Research Assistant

Forest products

[email protected]

Infrastructure

Andreas Kindahl

Head of Global Infrastructure

[email protected]

Michele Sindico

Director

Project Finance

[email protected]

Daniel Annas

Associate

Utilities

[email protected]

Meet Our Analytical Team

International Public Finance

Alexander Ekbom

Director

Supranationals

[email protected]

Carina Redelius

Associate

IPF

[email protected]

Carl Nyreröd

Director

IPF

[email protected]

Dennis Nilsson

Associate

IPF

[email protected]

Gabriel Forss

Associate Director

IPF

[email protected]

Erik Karlsson

Rating Analyst

IPF

[email protected]

Andrea Croner

Associate

IPF

[email protected]

Johanna Melinder

Research Assistant

IPF

[email protected]

Meet Our Commercial Team

Magnus Nystedt

Commercial Business Manager

New Sales

[email protected]

Depth and Breadth of Our Stockholm/Nordic Region Coverage(All numbers are as of August 2018)

34 Employees

200+ Rated entities

23 Rating Analysts

Economic Research:

Sweden And Norway Are Set For Monetary PolicyTighteningAugust 16, 2018

Key Takeaways

- The Swedish economy has recovered strongly since the financial crisis. It grew by 17% inthe decade 2007 to 2017, compared with just 6% for the euro area.

- Robust domestic demand has helped reduce Sweden's current account surplus to amore sustainable 3.3% of GDP in 2017 from 8.2% in 2007. But it has also led to somesigns of overheating in the housing market, now a key domestic risk for the economicoutlook.

- Until the oil price slump, Norway's economy had performed similarly well to Sweden.However, given the importance of its petroleum sector, the economy is still recoveringfrom the oil price shock in 2014-2016.

- A recovery in Norway, partly driven by strong housing investment, has led to fast-risinghousing prices in Norway, and household debt is among the highest in the OECD. Anabrupt price correction could therefore disturb households' confidence quickly.

- Faced with overheating housing markets and inflation rates heading towards the 2%target, the Swedish and Norwegian central banks are both keen to tighten monetarypolicy. We expect the first rate hikes are likely as soon as September in Norway and in Q4this year in Sweden.

The Swedish and Norwegian economies have both recovered better from the financial crisis thanthe other Nordic economies. Sweden, a stellar performer, has seen GDP rise by around 2.8%annually since 2010. Norway's economy performed similarly well until being hit by the oil priceslump in 2015-2016, but is now recovering again. By comparison, Finland, at the other end of thespectrum, has struggled to find its way out of the crisis, suffering from high unit labor costs and adecline in its key industries. GDP was still slightly below its 2008 GDP peak in 2017 (see chart 1).

Given differences in their economic performance, Nordic countries are not yet all at the samestage of the business cycle. Nonetheless, internal inflationary pressures have started to build,pointing to an imminent monetary policy tightening and thus tighter borrowing conditions in

Economic Research:

Sweden And Norway Are Set For Monetary PolicyTighteningAugust 16, 2018

SENIOR ECONOMIST

Marion Amiot

London

+ 44 20 7176 0128

[email protected]

www.spglobal.com/ratingsdirect August 16, 2018 1

Sweden and Norway.

Chart 1

Sweden's Economy Is The Nordics' Star

Strong domestic fundamentals have helped the Swedish economy perform better than its Nordicneighbors since the financial crisis, with GDP running above its potential output since 2016.Consumers' income has risen on the back of strong job creation--the economy has created half amillion jobs over the past 10 years. As a result, household net wealth has risen by 105% since2007. This is twice as much as Germany, which has arguably the tightest labor market in theeurozone. Swedish households, in a stronger financial position, have been consuming more. Yetthey have also significantly raised their investment in housing, boosting construction activity.Solid aggregate demand has accelerated investment, helping to restore corporate profitability.Exports have also continued to perform well. That said, the structural adjustment towards a moredomestically focused economy has been accompanied by a reduction in Sweden's current accountsurplus to 3.3% of GDP in 2017, towards more sustainable levels than the 8.2% of GDP back in2007 (see chart 2).


Economic Research: Sweden And Norway Are Set For Monetary Policy Tightening

Chart 2

The outlook remains buoyant, with GDP set to continue to expand slightly above potential by 2.5%this year and 2.2% in 2019. We expect domestic demand will continue to be the main impetus ofgrowth, with the labor market continuing to support consumer demand, especially as it startstranslating into wage growth. Meanwhile, high capacity constraints and low interest rates willfurther incentivize companies to invest.

The main risk to the outlook lies in the overheating housing market. Real house prices haveincreased by around 60% in the past 10 years (see chart 6), as households have heavily invested inhousing. As a result, the share of households with debt to disposable income above 450% rose to37% in 2015, up from 21% in 2011, according to the IMF. Running a "house price crash" scenario,we find that a 30% fall in housing prices could lower growth by 0.9 percentage points (pp) nextyear and 0.7pp in 2020 (for more details see “Can A Housing Market Crash Cripple Sweden’sEconomy,” published June 26, 2018, on RatingsDirect). However, the recent stabilization ofhousing prices since the price corrections in the second half of 2017 suggests that most of thecorrection is already behind us. The overall impact of this recent episode is likely to lead to someslowdown in activity, especially in the housing sector, as household and business sentiment havedipped slightly.



Chart 3

Another key for the development of Sweden's economic outlook will be at what point the centralbank will start raising rates, given the economy is running at, or even above potential. Inflationpressures have been moderate in spite of the economic boom (see chart 3), likely because ofdownward pressures on labor costs at an international level. The Riksbank, Sweden's centralbank, has thus been in wait-and-see mode so far. Yet, with slack in the economy continuing todiminish, price pressures are now starting to show (see chart 4), keeping inflation closer to theRiksbank's 2% target. We therefore expect headline inflation to reach 2.4% annually this year and2.6% in 2020, giving the central bank enough support for a first rate hike. Currently, the market ispricing in a first rate hike in Q4 2018. Nonetheless, with interest rates in negative territory and thehiking path likely to be gradual, we expect borrowing conditions to tighten only very slowly.



Chart 4

Norway Is Recovering From The Oil Price Shock

The Norwegian economy has performed similarly to Sweden since the financial crisis, but hassuffered under the slump in oil prices in 2015-2016 given the importance of its petroleum sector.Loose macroeconomic policy, with interest rates at a historical low and a supportive fiscal policy,have helped the economy recover since then. The depreciation of the currency following the dropin oil prices has raised competitiveness and thus exports in the non-oil sector, which hastraditionally suffered from high unit labor costs. Meanwhile, strong job creation in the publicadministration and mainland sectors has helped offset lower employment in the oil industry,sinking the unemployment rate to 3.9% in Q1 2018, its lowest level since the end of 2014. This hasboosted household real disposable income, leading to a rebound in consumption and stronginvestment in dwellings (see chart 5).

Looking forward, business surveys suggest the recovery is well under way, with confidence on anupward trend in both the oil and non-oil industries. We expect the growth composition to reverttowards its more traditional drivers, as petroleum output rebounds on the back of higher oilprices. In turn, this should translate into further acceleration in business investment, which onlystarted to rebound last year. This should also help restore corporate profit margins. By contrast,investments in the housing market, which have been a key driver of the recovery so far, are likely toweigh on growth in the medium term. We expect them to return to more sustainable levelsfollowing the recent correction in housing prices. Nonetheless, a strong labor market will continueto boost household income and thus consumer spending. Finally, the exchange rate remainsslightly undervalued, which should continue to benefit non-oil exports in the short term.



Chart 5

Overall, we expect GDP to grow at 2% this year, dragged down by a sluggish petroleum sector asmainland growth is set to reach 2.5%. GDP should then slow to 1.6% next year, and 2.1% in 2020,as the economy continues to close its output gap. Seeing capacity constraints diminishing,Norway's central bank, Norges Bank, has already said it is likely to raise rates from its historicallow of 0.5% in September. That said, capacity constraints remain low compared to 2007,suggesting the central bank is unlikely to raise interest rates too fast, as the economy has not yetreached potential. What's more, inflation has yet to stabilize around the 2% target.

While not an imminent concern, the main domestic risk for the Norwegian economy still lies in anoverheating housing market (see chart 6). A house price correction is a key risk, especially ashouseholds are among the most indebted in the OECD, with debt to disposable income at 244% in2017. This is much more than the 185% debt ratio of Swedish households. That said, the risk of asharp correction seems limited in the short term. The government has introducedmacroprudential measures to limit leverage, leading house prices to cool off since 2017, and theyare now stabilizing after a correction in Q1 this year.



Chart 6

Housing Markets Are Key Concerns For Financial Stability

Overall, the Swedish and Norwegian economies have weathered the financial crisis much betterthan their Nordic and eurozone peers. Having taken a hit from lower oil prices, Norway's economicperformance has lost some ground to Sweden, and is thus at a slightly earlier stage of thebusiness cycle. Nevertheless, both countries have experienced overheating housing markets inrecent years. House prices have risen on the back of supply-demand imbalances as well as fiscalincentives. As a result, the house price-to-income ratios in Sweden and Norway are close to theirhighest points since 1993 (see chart 7). Authorities have resorted to macroprudential tools to limithousehold indebtedness, such as capping loan-to-value ratios on mortgages and introducingstricter amortization rules. Yet, this had little effect until late 2017, when prices started to fall.

The Riksbank and the Norges Bank have watched housing market developments with a wary eye,especially concerned about financial stability. As domestic and international price pressures arenow stronger as a result of tighter capacity utilization globally, both central banks are set totighten monetary policy this year. However, they are likely to raise interest rates only gradually toensure that highly leveraged households can weather higher borrowing costs.



Chart 7

This report does not constitute a rating action.



Economic Research:

Nordic Corporates Aren't Likely To Lose Their TasteFor Capital Market FundingAugust 16, 2018

Key Takeaways

- Nordic nonfinancial corporates obtain a larger share of financing through bonds thaneurozone corporates. That said, they still have a long way to go when compared to theU.S.

- The large and growing pool of institutional investors in the Nordic countries has boosteddemand for nonfinancial firms' bonds and helped lower the cost of financing on capitalmarkets, making issuance more attractive as a source of finance.

- The low-yield environment has also pushed institutional investors towardhigher-yielding nonfinancial corporate debt securities. They have increased the share ofdomestic corporate securities in their portfolios relative to domestic governmentsecurities.

- We don't expect the trend toward market-based financing to reverse with monetarytightening.

In the Nordics, nonfinancial firms have traditionally gone to the bank to look for external funding.Over the past decade, however, corporates have increasingly turned toward capital markets. Thebackdrop to this shift is a large pool of institutional investors in the Nordic countries as well as anaccommodative monetary policy. With borrowing conditions set to tighten, we look at currenttrends and determinants in the financing structure of nonfinancial corporates in the Nordics tounderstand their move away from bank lending toward more bond issuance.

Capital Markets In The Nordics Are More Developed Than In TheEurozone

In the past decade, nonfinancial corporations in Nordic countries have been getting more of theirfunding through bond issuance than bank loans (see chart 1). Nordic countries' move to themarket fits into a broader European trend of increased disintermediation--the move away from

Economic Research:

Nordic Corporates Aren't Likely To Lose Their TasteFor Capital Market FundingAugust 16, 2018

ECONOMIST

Sarah Limbach

Paris

+ 33 14 420 6708

[email protected]

SENIOR ECONOMIST

Marion Amiot

London

+ 44 20 7176 0128

[email protected]


bank loans toward bond issuance for financing. Eurozone companies are generally turningincreasingly to the markets for funding (see "Eurozone Corporates' Move To Market-basedFinancing Is Here To Stay," published on June 18, 2018). Interestingly, although disintermediationin the Nordics lags the U.S., capital markets there are more developed than in the eurozone, andthe share of bond issuance in the sources of funding for Nordic corporates comes close to that ofthe U.K. Nonfinancial corporations in Sweden, Norway, and Finland get a bigger share of theirfinancing on the capital markets than their eurozone peers.

Chart 1

The Broad And Growing Pool Of Institutional Investors Is A Key Driver OfMarket-Based Finance

If Nordic countries' capital markets are more developed than those of their eurozone neighbors, itis partly thanks to the presence of a large and growing pool of domestic institutional investorssuch as pension funds and insurance companies (see charts 2 and 3). This is closely linked to thenature of Nordic welfare states, where pension systems are generally much more market-based(that is, they have more funded elements) than in the eurozone. The Government Pension Fund ofNorway, which manages close to $1 trillion, is one example of this trend.


Economic Research: Nordic Corporates Aren't Likely To Lose Their Taste For Capital Market Funding

Chart 2 Chart 3

Domestic institutional investors are important buyers of corporate debt securities and thus a keydriver of disintermediation. In 2017, they held around 22% of bonds issued by residentnonfinancial corporates in Sweden and Finland, and 19% in Norway (excluding investment funds,see chart 4). Given highly integrated regional capital markets, institutional investors in the Nordiccountries also held considerable shares of debt securities issued in their neighboring countries.One exception is Denmark, where institutional investors seem to have a lesser appetite fornonfinancial corporate debt. Last year, less than 1% of their total resident debt holdings werenonfinancial corporate bonds, compared with 12.5% in Sweden.



Chart 4

An Accommodative Monetary Policy And The Search For Yield HavePowered Corporate Bond Issuance

Similar to what happened in the eurozone, accommodative monetary policy measures since thefinancial crisis in Europe have helped reduce corporates' cost of market financing, working as anincentive for Nordic corporates to obtain capital market funding. Bond purchases within theframework of quantitative easing by the ECB and Riksbank have boosted the quantity of moneyavailable on the capital markets, and with it demand for bonds and thus put downward pressureon yields across all asset classes. As a result, the cost of bond market financing has declined morethan that of loan financing. In a similar way, the Norwegian government established a Norwegiankrone 50 billion bond fund to increase liquidity and capital flows to the Norwegian credit bondmarket. This fund had even more direct effects on corporates' cost of bond issuance than centralbanks' asset purchases. It has invested in securities issued by Norwegian corporates only, thuslowering yields on corporate bonds, making the move toward market-based financing moreattractive in Norway.

In the search for yield, investors have rebalanced their portfolios, favoring corporate bonds overgovernment bonds, especially for smaller, speculative-grade corporates. Granted, governmentbonds continue to make up the lion's share of bonds held by institutional investors, but this hasdeclined over the past few years (see chart 5). This has had the direct effect of lowering corporatebond yields in Finland, Sweden, and Norway, and has also indirectly lowered them in Denmark,due to spillover effects in these closely integrated capital markets. As a result, an increasingnumber of small corporates have issued debt securities on the capital markets, which largecorporates have traditionally dominated.



Unlike Peers In The Eurozone, Nordic Banks Withstood The GlobalFinancial Crisis Quite Well

With the experience from their banking crises in the early 1990s, Sweden and Norway successfullymanaged the 2008 financial crisis, thus preventing disruptions in the banking sector. Theirrespective central banks acted quickly to support liquidity in the banking system. Finland hadeven prepared a support package for the banking sector, but the solid health of its banks did notrequire its implementation. As a result, in contrast to the eurozone, the health of the bankingsector was not a factor limiting nonfinancial corporate funding. The only exception was Denmark'sbanking sector, where banks struggled to obtain liquidity to finance themselves and corporates.As Danish banks had progressively turned toward short-term foreign market financing, theystruggled to get funds in the face of turmoil on international financial markets, pushing corporatesonto the capital markets for funding.

Nonetheless, bank lending surveys suggest that tighter regulatory standards have weighed onbank lending to corporates. Aiming to learn from its failure to prevent or limit the credit bubblethat developed before 2008, Denmark implemented European banking regulations. Norway andSweden also implemented banking regulation in line with European standards, setting even highercapital requirements. The implementation of higher capital adequacy ratios has led to tightercredit standards, turning out to be an incentive for nonfinancial corporates to look for othersources of financing, such as debt securities.

Chart 5



Healthier Corporates Limit A Stronger Move Towards Market-BasedFinancing

Chart 6 Chart 7

Chart 8 Chart 9

Swedish corporates had been moving toward market-based financing well before the crisis andhave been even more so since then, with the share of bonds in total external financing (financingthrough bank loans and debt securities) doubling over the past 10 years. It seems that mainly twoelements hampered stronger recourse to the capital markets. First, following the crisis, weakaggregate demand suggests that nonfinancial corporates were not looking for funding to invest.



Second, since 2011, improving cash positions have also reduced their need for financing throughdebt.

The situation of Norwegian nonfinancial corporations is very similar to that of Sweden's withrespect to external financing. The ratio of debt securities to bank loans has doubled over the past10 years, as tighter credit standards weighed on bank lending. That ratio might have been strongerhad it not been for a contained need for external financing. Weak economic activity in theaftermath of the financial crisis led to disinvestment in the private business sector and a declinein corporates' financing needs. Over the past two years, nonfinancial corporations in Norway havereduced their debt thanks to improved cash holdings, notably through paying back bonds lastyear.

Finish nonfinancial corporations' recourse to bond issuance was at its highest in 2013 and 2014,with 21% of financing through capital market debt. A solid increase in cash allowed corporates toreduce leverage over the following three years. It seems that a large chunk of cash was used to payback bonds. The improved internal health of corporates has thus countered their move towardmarket-based financing. It does not appear as if this development is due to financing conditionsand therefore bond issuance is likely to rise once corporates start looking again for debt financing.

Danish corporates faced tighter bank lending conditions, more alike their eurozone peers, whichpushed them to turn to greater market-based financing: In 2008, bonds made up 5% ofnonfinancial corporates' external financing, increasing to 12% in 2017, although it remains clearlylower than in the other Nordic countries. On top of a slow recovery in business investment, thismight explain why corporate debt levels have remained broadly stable since 2008 and below itsneighbors.

Disintermediation Isn't Likely To Make An About-Face With ATightening Of Monetary Policy

Bond issuance is a structural feature of nonfinancial corporate financing in the Nordics, and wetherefore do not expect disintermediation to reverse course. Corporates based in the Nordicsresorted to capital markets for financing well before the financial crisis. The rising importance ofinstitutional investors such as pension funds--like the Government Pension Fund ofNorway--have been key drivers of this trend. With policy not looking to make pension systems lessmarket based, demand for corporate bonds by institutional investors is likely to remain large inthe Nordics.

What's more, we expect the tightening of monetary conditions to be very gradual in the Nordics(see "Sweden and Norway's economies are set for monetary policy tightening," Aug. 15, 2018) andthe eurozone (see "Monetary Policy Normalization In The Eurozone Will One Size Fit All?" June 27,2018). This should mean that money supply will remain ample in markets and continue to limitupward pressure on yields in the next few years. Thus, in the search for yield, institutionalinvestors in the region are unlikely to reduce the share of nonfinancial corporate bonds in theirportfolios in the years ahead, further supporting demand for corporate debt securities. Oncemarket liquidity deteriorates (when the Riksbank and ECB shrink their balance sheets, not before2020), which we see happening only very gradually, this is likely to dampen buying ofspeculative-grade rather than investment-grade bonds.

Finally, the current low interest rate environment has pushed midsize corporates onto the capitalmarkets, which previously had mainly been used by large corporates. Now that these midsizecorporates have paid the upfront cost of issuing bonds for the first time (for example, acquiringspecialist knowledge), we expect them to remain there, thus sustaining the trend toward



disintermediation. However, despite this and considerable demand from investors fornonfinancial corporate bonds, the size of corporates is still a factor limiting a faster shift to themarket. Small corporates struggle to afford the cost of entering the capital markets, hamperingthe process of moving from bank to market financing.




Default, Transition, and Recovery:

2017 Inaugural Nordic Default Study And RatingTransitionsAugust 14, 2018

For nearly 25 years, the credit quality of the companies S&P Global Ratings rates in the Nordicregion has remained strong, and 2017 was no exception. Last year, upgrades in the regionoutpaced downgrades by a margin of 2.25, which is above the average of 1.2 annually since 1995.By comparison, the global equivalents were 1 last year and an average of 0.87. There was only onedefault in the Nordic region in 2017, resulting in an overall default rate of 0.7%. This followed theall-time annual high overall default rate of just 2% in 2016.

In total there have been only 14 rated defaults in the Nordic region (Denmark, Finland, Iceland,Norway, and Sweden). And of these, there have only been nine unique defaulters, as three issuersdefaulted multiple times. Most of these defaults have come from nonfinancial issuers, thoughunsurprisingly, two Icelandic banks defaulted in October 2008 during the country's financial crisis.(One was Glitnir Bank, which the government nationalized via receivership.) Despite this period ofstress, the rating profile of Nordic corporations remains far stronger than that of both its globaland European counterparts.

Overview

- The rated population in the Nordic region is characterized by strong credit quality, asreflected in the ratings distribution, which is heavily skewed toward investment grade.Although the percentage of investment-grade corporate issuers has declined steadilyover time, at the start of 2018, 75% (nonfinancials and financial services) were stillinvestment-grade. Meanwhile, globally the rating distribution is broken out roughlyevenly between investment-grade and speculative-grade.

- Given the consistently strong rating distribution, defaults have been rare in the Nordicregion. The annual high came in 2016, with an overall default rate of just 2%. Globally,the highest overall default rate was 4.2% in 2009. Since 1995, there has only been oneinvestment-grade default in the Nordic region: Glitnir Bank, which defaulted duringIceland's financial crisis in 2008.

- Credit quality in the Nordic region has recently improved. For the last four years,upgrades have outpaced downgrades, with the proportion of upgrades exceeding 11%since 2014.

Default, Transition, and Recovery:

2017 Inaugural Nordic Default Study And RatingTransitionsAugust 14, 2018

GLOBAL FIXED INCOME RESEARCH

Diane Vazza

New York

(1) 212-438-2760

[email protected]

Nick W Kraemer, FRM

New York

(1) 212-438-1698

[email protected]


The Nordic region--which for the purposes of this study we define as Denmark, Finland, Iceland,Norway, and Sweden--is characterized by historically high credit quality, supported by generallystrong fiscal management. This is reflected in the region's low general government debt levelscompared to those of larger European peers (see chart 1). This is particularly the case in recentyears, and it has helped the region maintain one of the strongest rating profiles.

Chart 1

In addition to low government debt, Nordic countries' banking sectors generally hold less debt (seechart 2). This has also helped the region's overall corporate population maintain a strong creditprofile. Recently, the five Nordic economies have shown solid growth, with Denmark and Swedendisplaying diversified economies, Finland outperforming expectations, and Norway's fiscal buffersenabling it to withstand the recent global decline in oil prices.


Default, Transition, and Recovery: 2017 Inaugural Nordic Default Study And Rating Transitions

Chart 2

This is not to say the region is entirely free of risks. Sweden--the largest country in the Nordicregion by most measures--has a banking system that relies on external funding, and its householddebt remains high, implying its recent GDP growth could be largely debt-driven. In addition,Iceland carries the risk of limited monetary policy flexibility alongside susceptibility to externalshocks. Household debt in Denmark is proportionally one of the highest in the world, and if oilprices were to decline rapidly, Norway's economy could experience some stress. Nevertheless, wecurrently consider most of these risks to be low. This should result in another year of stableratings performance, with low defaults and limited downgrades in 2018.

After suffering multiple downgrades over the 10 years since the financial crisis of 2008, globallythe population of 'AAA' rated issuers at the sovereign and corporate levels has greatly diminished.Nonetheless, as of the start of 2018, the median rating among the five Nordic sovereigns remains'AAA', and as of June, the median corporate rating in the region was 'BBB+'. In fact, the corporateratings distribution within the Nordic region has deteriorated very little (see chart 3). For theremainder of Europe, the median sovereign foreign-currency rating is 'A-', with a median corporaterating of 'BBB-'. Meanwhile, the U.S. remains at 'AA+' after its downgrade seven years ago, but themedian rating of its corporate population is much lower at 'BB'.



Chart 3

Chart 4

Ratings continued to serve as effective indicators of relative credit risk in the Nordic region in2017, in line with global trends. This study of corporate defaults identified a clear negativecorrelation between ratings and defaults: The higher the issuer credit rating, the lower the



observed default frequency (see chart 5).

Chart 5

As previously mentioned, there have only been 14 defaults within the Nordic region since 2001,which makes comparisons globally or with other regions difficult from a statistical perspective.Nonetheless, the region's defaults appear to be somewhat coincident with global trends (seechart 6). This was particularly true in 2015-2016, which was marked by a high number of defaultsin the energy and natural resources sector, particularly oil and gas companies. This sector is ofparticular importance for Norway, which had four of the six defaults during that time--two ofthose from the oil and gas sector.



Chart 6

Default activity in the Nordic region has been extremely rare (see Table 1). Throughout the entiretime S&P Global Ratings has rated firms in this region, there has only been one investment-gradedefault: Glitnir Bank of Iceland. The highest annual default rate was a still very low 2% in 2016.Also, the last three years have been something of an anomaly, as this has been the longest streakof consecutive years with at least one default.

Table 1

Nordic Corporate Default Summary

YearTotal

defaults*Investment-grade

defaultsSpeculative-grade

defaultsDefault

rate (%)Investment-grade

default rate (%)Speculative-grade

default rate (%)

1995 0 0 0.00 0.00 0.00

1996 0 0 0.00 0.00 0.00

1997 0 0 0.00 0.00 0.00

1998 0 0 0.00 0.00 0.00

1999 0 0 0.00 0.00 0.00

2000 0 0 0.00 0.00 0.00

2001 1 0 1 1.06 0.00 10.00

2002 0 0 0.00 0.00 0.00

2003 1 0 1 0.96 0.00 8.33

2004 0 0 0.00 0.00 0.00



Table 1

Nordic Corporate Default Summary (cont.)

YearTotal



defaultsDefault

rate (%)Investment-grade

default rate (%)Speculative-grade

default rate (%)

2005 1 0 1 0.88 0.00 6.25

2006 0 0 0.00 0.00 0.00

2007 0 0 0.00 0.00 0.00

2008 2 1 0 0.90 1.03 0.00

2009 0 0 0.00 0.00 0.00

2010 0 0 0.00 0.00 0.00

2011 0 0 0.00 0.00 0.00

2012 1 0 1 0.85 0.00 4.17

2013 1 0 1 0.78 0.00 3.33

2014 0 0 0.00 0.00 0.00

2015 3 0 1 0.70 0.00 2.50

2016 3 0 3 2.04 0.00 8.33

2017 1 0 1 0.69 0.00 2.86

Average 2 0 0 0.39 0.04 1.99

Median 1 0 0 0.00 0.00 0.00

Standarddeviation

1 0 1 0.55 0.21 3.23

Minimum 1 0 0 0.00 0.00 0.00

Maximum 3 1 3 2.04 1.03 10.00

*This column includes companies that were no longer rated at the time of default. Sources: S&P Global Fixed Income Research and S&P GlobalMarket Intelligence's CreditPro®.

By comparison, global corporate defaults fell to 95 in 2017, down from 163 in 2016 and 113 in2015 as global energy markets slowly stabilized. The most recent (and all-time) annual high wasduring the financial crisis in 2009, when there were 268 defaults (see Table 2).

Table 2

Global Corporate Default Summary

YearTotal



defaults

Defaultrate(%)

Investment-gradedefault rate (%)

Speculative-gradedefault rate (%)

Total debtoutstanding

(Bil. $)

1981 2 0 2 0.14 0.00 0.62 0.1

1982 18 2 15 1.19 0.18 4.41 0.9

1983 12 1 10 0.76 0.09 2.94 0.4

1984 14 2 12 0.91 0.17 3.27 0.4

1985 19 0 18 1.11 0.00 4.32 0.3

1986 34 2 30 1.72 0.15 5.67 0.5

1987 19 0 19 0.94 0.00 2.79 1.6



Table 2

Global Corporate Default Summary (cont.)

YearTotal



defaults

Defaultrate(%)




(Bil. $)

1988 32 0 29 1.38 0.00 3.85 3.3

1989 44 3 35 1.77 0.22 4.67 7.3

1990 70 2 56 2.73 0.14 8.12 21.2

1991 93 2 65 3.25 0.14 11.05 23.7

1992 39 0 32 1.49 0.00 6.10 5.4

1993 26 0 14 0.60 0.00 2.50 2.4

1994 21 1 15 0.63 0.05 2.11 2.3

1995 35 1 29 1.05 0.05 3.53 9.0

1996 20 0 16 0.51 0.00 1.81 2.7

1997 23 2 20 0.63 0.08 2.01 4.9

1998 56 4 48 1.28 0.14 3.66 11.3

1999 109 5 92 2.14 0.17 5.56 39.4

2000 136 7 109 2.48 0.24 6.23 43.3

2001 229 7 173 3.78 0.23 9.87 118.8

2002 226 13 159 3.59 0.42 9.50 190.9

2003 119 3 89 1.92 0.10 5.07 62.9

2004 56 1 38 0.78 0.03 2.02 20.7

2005 40 1 31 0.60 0.03 1.50 42.0

2006 30 0 26 0.48 0.00 1.19 7.13

2007 24 0 21 0.37 0.00 0.91 8.15

2008 127 14 89 1.80 0.42 3.69 429.6

2009 268 11 224 4.18 0.33 9.90 627.7

2010 83 0 64 1.20 0.00 3.01 97.5

2011 53 1 44 0.80 0.03 1.84 84.3

2012 83 0 66 1.14 0.00 2.58 86.7

2013 81 0 64 1.06 0.00 2.30 97.3

2014 60 0 45 0.69 0.00 1.43 91.6

2015 113 0 94 1.36 0.00 2.76 110.3

2016 163 1 143 2.08 0.03 4.21 239.8

2017 95 0 83 1.20 0.00 2.44 104.6

Average 72 2 57 1.45 0.09 4.04 70.3

Median 53 1 38 1.19 0.03 3.27 20.7

Standarddeviation

65 4 51 0.99 0.12 2.69 126.9

Minimum 2 0 2 0.14 0.00 0.62 0.1



Table 2

Global Corporate Default Summary (cont.)

YearTotal



defaults

Defaultrate(%)




(Bil. $)

Maximum 268 14 224 4.18 0.42 11.05 627.7

*This column includes companies that were no longer rated at the time of default. Sources: S&P Global Fixed Income Research and S&P GlobalMarket Intelligence's CreditPro®.

Corporate ratings within the Nordic region are generally highly stable, which is expected giventheir strong ratings distribution (see Table 3). Over the long term, Nordic corporates showed aweighted average rate of unchanged ratings of 74.2%. This is slightly higher than the globalequivalent of 70.6%. And although corporate ratings generally tend toward downgrades over time,the long-term weighted average downgrade-to-upgrade ratio among Nordic corporates iscomparably low at 2.

Table 3

Summary Of Nordic Net Annual Corporate Rating Activity (%)*

Year IssuersUpgrades

(%)Downgrades¶

(%)Defaults

(%)

Withrawnratings

(%)

Changedratings

(%)Unchangedratings (%)

Downgrade/upgraderatio§

1995 38 7.89 7.89 0.00 0.00 15.79 84.21 1.00

1996 44 20.45 4.55 0.00 2.27 27.27 72.73 0.22

1997 61 16.39 6.56 0.00 6.56 29.51 70.49 0.40

1998 65 9.23 7.69 0.00 4.62 21.54 78.46 0.83

1999 75 1.33 13.33 0.00 12.00 26.67 73.33 10.00

2000 79 6.33 10.13 0.00 7.59 24.05 75.95 1.60

2001 94 3.19 17.02 1.06 10.64 31.91 68.09 5.33

2002 97 2.06 18.56 0.00 4.12 24.74 75.26 9.00

2003 104 7.69 12.50 0.96 3.85 25.00 75.00 1.63

2004 109 6.42 6.42 0.00 5.50 18.35 81.65 1.00

2005 114 16.67 7.02 0.88 9.65 34.21 65.79 0.42

2006 111 8.11 10.81 0.00 10.81 29.73 70.27 1.33

2007 107 10.28 7.48 0.00 3.74 21.50 78.50 0.73

2008 111 5.41 21.62 0.90 1.80 29.73 70.27 4.00

2009 113 8.85 21.24 0.00 2.65 32.74 67.26 2.40

2010 115 6.09 7.83 0.00 4.35 18.26 81.74 1.29

2011 113 10.62 7.96 0.00 1.77 20.35 79.65 0.75

2012 118 4.24 14.41 0.85 4.24 23.73 76.27 3.40

2013 128 5.47 7.03 0.78 5.47 18.75 81.25 1.29

2014 132 13.64 5.30 0.00 5.30 24.24 75.76 0.39

2015 143 11.19 11.19 0.70 5.59 28.67 71.33 1.00

2016 147 14.29 8.16 2.04 7.48 31.97 68.03 0.57



Table 3

Summary Of Nordic Net Annual Corporate Rating Activity (%)* (cont.)

Year IssuersUpgrades

(%)Downgrades¶

(%)Defaults

(%)

Withrawnratings

(%)

Changedratings

(%)Unchangedratings (%)

Downgrade/upgraderatio§

2017 144 12.50 5.56 0.69 8.33 27.08 72.92 0.44

Weightedaverage

9.02 10.54 0.47 5.76 25.78 74.22 2.03

Average 9.06 10.45 0.39 5.58 25.47 74.53 2.13

Median 8.11 7.96 0.00 5.30 25.00 75.00 1.00

Standarddeviation

4.91 5.05 0.55 3.16 5.18 5.18 2.65

Minimum 1.33 4.55 0.00 0.00 15.79 65.79 0.22

Maximum 20.45 21.62 2.04 12.00 34.21 84.21 10.00

*This table compares the net change in ratings from the first to the last day of each year. All intermediate ratings are disregarded. ¶Excludesdowngrades to 'D', shown separately in the default column. §Downgrades to 'D' are excluded in this metric. Sources: S&P Global Fixed IncomeResearch and S&P Global Market Intelligence's CreditPro®.

From January 1981 through June 2018, 14 default events--including four confidentialissuers--were reported in the Nordic region. Table 4 shows the default events for the publicallyrated issuers over this time, and appendix I provides summaries of the events leading up to eachdefault and--in some cases--following it (excluding the issuers with confidential ratings).

Table 4

Publicly Rated Nordic Defaults

Company Industry Country Default dateRating priorto default

Firstrating

First ratingdate

Enitel ASA Telecommunications Norway 8/29/2001 B- B 3/23/2000

PetroleumGeo-Services ASA

Energy and natural resources Norway 7/29/2003 CC BBB- 5/1/1996

Nobina AB Transportation Sweden 2/15/2005 CC BB 1/17/2000

Glitnir Bank Financial institutions Iceland 10/9/2008 CCC A- 3/28/2006

Nobina AB Transportation Sweden 8/2/2012 CC CC 10/7/2005

NorskeSkogindustrier ASA

Forest and buildingproducts/homebuilders

Norway 2/12/2013 CCC+ BBB 10/12/2001



Norway 2/27/2015 CC CCC+ 2/15/2013



Norway 4/13/2016 CC CCC+ 3/6/2015

PetroleumGeo-Services ASA

Energy and natural resources Norway 12/23/2016 CC B+ 5/6/2005



Norway 7/18/2017 CC CCC- 4/29/2016

Sources: S&P Global Fixed Income Research and S&P Global Market Intelligence's CreditPro®.



Higher Ratings Are Consistent With Fewer Defaults

The breakout of default rates by rating modifier (a plus or minus after the rating) shows that lowerrating categories historically experience higher default rates, on average. However, variability ispossible in any given year, particularly when examining the relatively small population of issuers inthe region (see Table 6). Nevertheless, the data from past default cycles indicate that most of thedefaults stemmed from the lowest ratings, with the only investment-grade default in the regionbeing Glitnir Bank in 2008.

Table 5

Nordic Corporate Default Rates By Rating Category (%)

AAA AA A BBB BB B CCC/C

1995 0.00 0.00 0.00 0.00 N/A 0.00 N/A

1996 0.00 0.00 0.00 0.00 0.00 0.00 N/A

1997 0.00 0.00 0.00 0.00 0.00 0.00 N/A

1998 0.00 0.00 0.00 0.00 0.00 0.00 N/A

1999 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2000 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2001 0.00 0.00 0.00 0.00 0.00 25.00 N/A

2002 0.00 0.00 0.00 0.00 0.00 0.00 N/A

2003 N/A 0.00 0.00 0.00 0.00 0.00 50.00

2004 N/A 0.00 0.00 0.00 0.00 0.00 0.00

2005 N/A 0.00 0.00 0.00 0.00 0.00 50.00

2006 N/A 0.00 0.00 0.00 0.00 0.00 0.00

2007 N/A 0.00 0.00 0.00 0.00 0.00 N/A

2008 0.00 0.00 2.78 0.00 0.00 0.00 N/A

2009 N/A 0.00 0.00 0.00 0.00 0.00 N/A

2010 N/A 0.00 0.00 0.00 0.00 0.00 0.00

2011 N/A 0.00 0.00 0.00 0.00 0.00 N/A

2012 N/A 0.00 0.00 0.00 0.00 9.09 N/A

2013 N/A 0.00 0.00 0.00 0.00 0.00 33.33

2014 N/A 0.00 0.00 0.00 0.00 0.00 0.00

2015 N/A 0.00 0.00 0.00 0.00 0.00 50.00

2016 N/A 0.00 0.00 0.00 0.00 11.11 50.00

2017 N/A 0.00 0.00 0.00 0.00 0.00 50.00

Average 0.00 0.00 0.12 0.00 0.00 1.97 23.61

Median 0.00 0.00 0.00 0.00 0.00 0.00 16.67

Standard deviation 0.00 0.00 0.58 0.00 0.00 5.81 25.08

Minimum 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Maximum 0.00 0.00 2.78 0.00 0.00 25.00 50.00

N/A--Not applicable. Sources: S&P Global Fixed Income Research and S&P Global Market Intelligence's CreditPro®.



Table 6

Nordic Corporate Default Rates By Rating Modifier (%)

AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC/C

1995 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 N/A N/A N/A N/A N/A 0.00 N/A N/A

1996 0.00 0.00 N/A 0.00 0.00 0.00 0.00 0.00 0.00 N/A N/A N/A 0.00 N/A 0.00 N/A N/A

1997 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 N/A N/A 0.00 0.00 N/A N/A N/A

1998 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 N/A N/A 0.00 0.00 0.00 N/A N/A N/A

1999 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 N/A 0.00 0.00

2000 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 N/A 0.00 0.00

2001 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 N/A 0.00 33.33 N/A

2002 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 N/A

2003 N/A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 N/A 0.00 50.00

2004 N/A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2005 N/A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 50.00

2006 N/A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2007 N/A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 N/A 0.00 0.00 0.00 0.00 N/A

2008 0.00 0.00 0.00 0.00 0.00 0.00 6.67 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 N/A

2009 N/A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 N/A

2010 N/A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2011 N/A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 N/A 0.00 0.00 N/A

2012 N/A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 N/A 0.00 20.00 N/A

2013 N/A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 33.33

2014 N/A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2015 N/A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 50.00

2016 N/A 0.00 N/A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 18.18 0.00 50.00

2017 N/A 0.00 N/A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 50.00

Average 0.00 0.00 0.00 0.00 0.00 0.00 0.29 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.01 2.81 23.61

Median 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 16.67

Standarddeviation

0.00 0.00 0.00 0.00 0.00 0.00 1.39 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.29 8.70 25.08

Minimum 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Maximum 0.00 0.00 0.00 0.00 0.00 0.00 6.67 0.00 0.00 0.00 0.00 0.00 0.00 0.00 18.18 33.33 50.00

N/A--Not applicable. Sources: S&P Global Fixed Income Research and S&P Global Market Intelligence's CreditPro®.

Industry Profile

Nearly all of the defaults identified in our Nordic region data series originate from nonfinancialcompanies (see Tables 7 and 8). To date, there have only been two recorded defaults amongNordic financial services companies, and these both came from Iceland in 2008 during the globalfinancial crisis. One of these was the very public government takeover of Glitnir Bank. An uptick in



defaults associated with the energy and natural resources sector between 2014 and 2016 drove ahigh 22.2% default rate among the energy and natural resources sector within the Nordic region in2016, yet this was not the highest sector-level annual default rate observed. That distinctionbelongs to the transportation sector in 2005, but the high default rate is more a function of a verysmall issuer base. In that year, only one default--Nobina AB--occurred, implying a very smallpopulation. Defaults within the Nordic region have been so rare that eight of the 13 sectorspresented here have never had a default.

Overall, the vast majority of speculative-grade issuers in the region are among nonfinancials. Infact, since 1995, there have only been six years that began with financial services companiescomprising 10% or more of the speculative-grade population. This reached a peak of 16% at thestart of 2009, but has since retreated again, back to only 5% at the start of 2018. To put thisdichotomy between financial services companies and nonfinancials in perspective, financialservices typically comprises about 40% of the overall rated population of corporate issuers in agiven year.

Table 7

Annual Nordic Corporate Default Rates By Industry (%)

YearAerospace/automotive/capital

goods/metalConsumer/service

sector

Energyand

naturalresources

Financialinstitutions


Healthcare/chemicals

Hightechnology/computers/office

equipment

1995 0.00 0.00 0.00 0.00 0.00 0.00 0.00

1996 0.00 0.00 0.00 0.00 0.00 0.00 0.00

1997 0.00 0.00 0.00 0.00 0.00 0.00 0.00

1998 0.00 0.00 0.00 0.00 0.00 0.00 0.00

1999 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2000 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2001 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2002 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2003 0.00 0.00 14.29 0.00 0.00 0.00 0.00

2004 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2005 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2006 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2007 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2008 0.00 0.00 0.00 3.03 0.00 0.00 0.00

2009 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2010 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2011 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2012 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2013 0.00 0.00 0.00 0.00 14.29 0.00 0.00

2014 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2015 0.00 0.00 0.00 0.00 12.50 0.00 0.00

2016 0.00 0.00 22.22 0.00 12.50 0.00 0.00

2017 0.00 0.00 0.00 0.00 14.29 0.00 0.00



Table 7

Annual Nordic Corporate Default Rates By Industry (%) (cont.)

Average 0.00 0.00 1.59 0.13 2.33 0.00 0.00

Weightedaverage

0.00 0.00 1.80 0.15 2.76 0.00 0.00

Median 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Standarddeviation

0.00 0.00 5.39 0.63 5.20 0.00 0.00

Minimum 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Maximum 0.00 0.00 22.22 3.03 14.29 0.00 0.00

InsuranceLeisure

time/mediaReal

estate Telecommunications Transportation Utility

1995 0.00 N/A N/A 0.00 N/A 0.00

1996 0.00 N/A N/A 0.00 0.00 0.00

1997 0.00 N/A N/A 0.00 0.00 0.00

1998 0.00 N/A N/A 0.00 0.00 0.00

1999 0.00 N/A N/A 0.00 0.00 0.00

2000 0.00 N/A 0.00 0.00 0.00 0.00

2001 0.00 N/A 0.00 16.67 0.00 0.00

2002 0.00 0.00 0.00 0.00 0.00 0.00

2003 0.00 0.00 0.00 0.00 0.00 0.00

2004 0.00 0.00 0.00 0.00 0.00 0.00

2005 0.00 0.00 0.00 0.00 25.00 0.00

2006 0.00 0.00 N/A 0.00 0.00 0.00

2007 0.00 N/A N/A 0.00 0.00 0.00

2008 0.00 N/A N/A 0.00 0.00 0.00

2009 0.00 N/A N/A 0.00 0.00 0.00

2010 0.00 N/A N/A 0.00 0.00 0.00

2011 0.00 N/A N/A 0.00 0.00 0.00

2012 0.00 N/A N/A 0.00 16.67 0.00

2013 0.00 N/A N/A 0.00 0.00 0.00

2014 0.00 N/A 0.00 0.00 0.00 0.00

2015 0.00 N/A 0.00 0.00 0.00 0.00

2016 0.00 0.00 0.00 0.00 0.00 0.00

2017 0.00 0.00 0.00 0.00 0.00 0.00

Average 0.00 0.00 0.00 0.72 1.89 0.00

Weightedaverage

0.00 0.00 0.00 0.88 1.98 0.00

Median 0.00 0.00 0.00 0.00 0.00 0.00

Standarddeviation

0.00 0.00 0.00 3.48 6.26 0.00



Table 7

Annual Nordic Corporate Default Rates By Industry (%) (cont.)

Minimum 0.00 0.00 0.00 0.00 0.00 0.00

Maximum 0.00 0.00 0.00 16.67 25.00 0.00

N/A--Not applicable. Includes investment-grade and speculative-grade rated entities. Sources: S&P Global Fixed Income Research and S&P CreditPro®.

Table 8

Cumulative Nordic Corporate Default Rates By Sector (%)

--All financials-- --All nonfinancials--

One-year Three-year 10-year One-year Three-year 10-year

1995 0.00 N/A N/A 0.00 N/A N/A

1996 0.00 N/A N/A 0.00 N/A N/A

1997 0.00 0.00 N/A 0.00 0.00 N/A

1998 0.00 0.00 N/A 0.00 0.00 N/A

1999 0.00 0.00 N/A 0.00 0.00 N/A

2000 0.00 0.00 N/A 0.00 0.00 N/A

2001 0.00 0.00 N/A 1.64 0.00 N/A

2002 0.00 0.00 N/A 0.00 0.00 N/A

2003 0.00 0.00 N/A 1.49 3.28 N/A

2004 0.00 0.00 0.00 0.00 1.56 0.00

2005 0.00 0.00 0.00 1.47 2.99 0.00

2006 0.00 0.00 0.00 0.00 1.49 3.03

2007 0.00 0.00 0.00 0.00 1.47 2.63

2008 1.96 0.00 0.00 0.00 0.00 2.17

2009 0.00 4.26 0.00 0.00 0.00 1.96

2010 0.00 1.96 0.00 0.00 0.00 4.92

2011 0.00 0.00 0.00 0.00 0.00 3.13

2012 0.00 0.00 0.00 1.52 1.59 2.99

2013 0.00 0.00 0.00 1.41 3.17 2.99

2014 0.00 0.00 0.00 0.00 3.03 2.94

2015 0.00 0.00 0.00 1.19 2.82 3.03

2016 0.00 0.00 4.26 3.53 4.00 5.00

2017 0.00 0.00 1.96 1.22 3.57 5.00

Average 0.09 0.30 0.44 0.59 1.38 2.84

Median 0.00 0.00 0.00 0.00 1.47 2.99

Standard deviation 0.41 1.00 1.22 0.93 1.50 1.55

Minimum 0.00 0.00 0.00 0.00 0.00 0.00

Maximum 1.96 4.26 4.26 3.53 4.00 5.00

"All financials" refers to financial institutions and insurance combined. Sources: S&P Global Fixed Income Research and S&P Global MarketIntelligence's CreditPro®.



Transition Tables And Cumulative Default Rates

Ratings behavior in the Nordic region continued to show consistency with global trends, exhibitinga negative correspondence between credit ratings and defaults, as observed through S&P GlobalRatings' transition matrices. Investment-grade issuers continued to show greater credit stabilitythan their speculative-grade counterparts in 2017. For example, observing the one-year periodstarting Jan. 1, 2017, and ending Dec. 31, 2017, of all the Nordic issuers rated 'A' at the beginningof the period, 95.7% were still rated 'A' at the end of the period, whereas the comparable share forissuers rated 'B' was only 64.7% (see Table 9). Based on the transition analysis for a three-yeartime horizon versus a one-year time horizon, lower ratings also tend to display less stability thanhigher ratings (see Table 10).

Table 9

One-Year 2017 Corporate Transition Rates: Nordic Versus Global

From/to AAA AA A BBB BB B CCC/C D NR

Nordic

AAA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

AA 0.00 82.35 0.00 0.00 0.00 0.00 0.00 0.00 17.65

A 0.00 0.00 95.65 0.00 0.00 0.00 0.00 0.00 4.35

BBB 0.00 0.00 4.35 91.30 4.35 0.00 0.00 0.00 0.00

BB 0.00 0.00 0.00 6.25 75.00 6.25 0.00 0.00 12.50

B 0.00 0.00 0.00 0.00 5.88 64.71 0.00 0.00 29.41

CCC/C 0.00 0.00 0.00 0.00 0.00 0.00 50.00 50.00 0.00

Global

AAA 64.29 35.71 0.00 0.00 0.00 0.00 0.00 0.00 0.00

AA 0.00 92.60 4.14 0.00 0.00 0.00 0.00 0.00 3.25

A 0.00 0.44 93.40 2.35 0.00 0.00 0.00 0.00 3.81

BBB 0.00 0.00 2.34 89.99 2.67 0.11 0.00 0.00 4.89

BB 0.00 0.00 0.08 3.56 80.53 4.70 0.00 0.08 11.06

B 0.00 0.00 0.00 0.00 3.73 75.70 4.06 0.99 15.52

CCC/C 0.00 0.00 0.00 0.41 0.00 17.28 37.86 26.34 18.11


This pattern is similar to the long-term (1995-2017) trend of ratings behavior among all globalrated issuers. Of the Nordic issuers rated 'AA', 90.6% retained this rating after one year, whereasonly 66% of issuers rated 'B' maintained that rating (see Table 10).

Table 10

Average One-Year Corporate Transition Rates (%)


Nordic (1995-2017)

AAA 75.00 15.63 3.13 0.00 0.00 0.00 0.00 0.00 6.25



Table 10

Average One-Year Corporate Transition Rates (%) (cont.)


(31.93) (24.22) (7.70) (0.00) (0.00) (0.00) (0.00) (0.00) (19.89)

AA 0.00 90.62 6.43 0.80 0.00 0.00 0.00 0.00 2.14

(0.00) (8.34) (7.56) (1.97) (0.00) (0.00) (0.00) (0.00) (5.11)

A 0.00 2.01 90.69 3.70 0.00 0.00 0.00 0.11 3.49

(0.00) (2.63) (5.78) (3.59) (0.00) (0.00) (0.00) (0.54) (2.80)

BBB 0.00 0.00 4.94 85.35 3.03 0.00 0.32 0.00 6.37

(0.00) (0.00) (6.48) (6.46) (3.42) (0.00) (1.57) (0.00) (4.73)

BB 0.00 0.00 0.00 7.00 75.50 6.50 0.00 0.00 11.00

(0.00) (0.00) (0.00) (7.03) (18.25) (6.83) (0.00) (0.00) (15.65)

B 0.00 0.00 0.00 0.00 9.26 66.05 4.94 2.47 17.28

(0.00) (0.00) (0.00) (0.00) (12.55) (17.61) (9.86) (5.47) (13.24)

CCC/C 0.00 0.00 0.00 0.00 0.00 22.73 36.36 27.27 13.64

(0.00) (0.00) (0.00) (0.00) (0.00) (33.01) (32.20) (24.36) (26.58)

Global (1981-2017)

AAA 86.99 9.12 0.53 0.05 0.08 0.03 0.05 0.00 3.15

(7.20) (7.27) (0.83) (0.25) (0.25) (0.17) (0.35) (0.00) (2.43)

AA 0.51 86.96 7.91 0.50 0.05 0.07 0.02 0.02 3.97

(0.53) (5.25) (4.18) (0.68) (0.19) (0.21) (0.07) (0.08) (1.87)

A 0.03 1.72 88.02 5.21 0.30 0.12 0.02 0.06 4.51

(0.09) (1.03) (3.64) (2.15) (0.39) (0.26) (0.07) (0.11) (1.74)

BBB 0.01 0.10 3.45 85.80 3.73 0.49 0.11 0.17 6.15

(0.04) (0.16) (1.62) (3.77) (1.51) (0.69) (0.22) (0.25) (1.58)

BB 0.01 0.03 0.12 4.88 77.20 6.79 0.58 0.68 9.71

(0.06) (0.09) (0.25) (1.86) (4.37) (3.08) (0.75) (0.84) (2.31)

B 0.00 0.02 0.08 0.18 5.07 74.31 4.44 3.60 12.29

(0.00) (0.08) (0.21) (0.22) (2.01) (4.11) (2.13) (3.22) (2.28)

CCC/C 0.00 0.00 0.12 0.21 0.59 13.22 43.37 26.86 15.62

(0.00) (0.00) (0.43) (0.67) (0.95) (7.83) (8.81) (11.08) (5.33)

Numbers in parentheses are weighted standard deviations. Sources: S&P Global Fixed Income Research and S&P Global Market Intelligence'sCreditPro®.

Transitions when considering rating modifiers also display the same relationship by and large,though differences in sample size occasionally create slight variations between adjacent ratingcategories (see Table 11).



Table 11

Average One-Year Transition Rates For Nordic Corporates By Rating Modifier (1995 - 2017) (%)

From/to AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC D NR

AAA 75.00 12.50 0.00 3.13 0.00 3.13 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6.25

(31.93) (24.80) (0.00) (7.70) (0.00) (7.70) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (19.89)

AA+ 0.00 83.33 13.33 0.00 0.00 0.00 0.00 1.67 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.67

(0.00) (18.98) (19.43) (0.00) (0.00) (0.00) (0.00) (6.38) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (6.38)

AA 0.00 0.00 76.39 9.72 4.17 2.78 1.39 1.39 0.00 1.39 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.78

(0.00) (0.00) (25.89) (19.63) (8.48) (6.37) (4.73) (8.43) (0.00) (4.73) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (9.45)

AA- 0.00 0.00 1.24 89.21 4.98 2.07 0.41 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.07

(0.00) (0.00) (3.37) (11.05) (7.43) (6.71) (2.15) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (5.19)

A+ 0.00 0.00 0.00 8.13 77.03 9.57 1.91 0.96 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.39

(0.00) (0.00) (0.00) (12.92) (17.34) (11.28) (3.79) (3.55) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (4.30)

A 0.00 0.00 0.00 0.58 5.19 78.96 8.07 1.44 0.58 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.19

(0.00) (0.00) (0.00) (2.21) (7.15) (14.79) (8.14) (2.75) (1.71) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (5.65)

A- 0.00 0.00 0.00 0.00 0.51 8.23 81.75 5.66 0.77 0.26 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.26 2.57

(0.00) (0.00) (0.00) (0.00) (2.72) (7.80) (12.38) (7.64) (1.87) (1.41) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (1.31) (4.58)

BBB+ 0.00 0.00 0.00 0.00 0.00 0.34 9.59 75.00 8.56 0.00 0.34 0.34 0.34 0.00 0.00 0.00 0.00 0.00 5.48

(0.00) (0.00) (0.00) (0.00) (0.00) (2.23) (12.45) (13.41) (8.82) (0.00) (1.86) (1.45) (1.41) (0.00) (0.00) (0.00) (0.00) (0.00) (6.04)

BBB 0.00 0.00 0.00 0.00 0.00 0.84 0.00 8.82 74.37 7.14 0.84 0.84 0.42 0.00 0.00 0.00 0.00 0.00 6.72

(0.00) (0.00) (0.00) (0.00) (0.00) (3.78) (0.00) (11.82) (14.16) (9.38) (2.42) (3.31) (1.79) (0.00) (0.00) (0.00) (0.00) (0.00) (8.38)

BBB- 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.06 19.39 56.12 10.20 1.02 0.00 0.00 0.00 0.00 2.04 0.00 8.16

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (6.90) (19.64) (21.84) (13.13) (5.08) (0.00) (0.00) (0.00) (0.00) (8.20) (0.00) (12.41)

BB+ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 17.19 60.94 14.06 1.56 0.00 0.00 0.00 0.00 0.00 6.25

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (22.83) (27.70) (18.47) (6.22) (0.00) (0.00) (0.00) (0.00) (0.00) (13.87)

BB 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.78 19.44 56.94 6.94 1.39 1.39 0.00 0.00 0.00 11.11

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (6.69) (19.36) (24.19) (11.36) (8.44) (12.02) (0.00) (0.00) (0.00) (16.91)

BB- 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.56 0.00 0.00 14.06 51.56 15.63 1.56 0.00 0.00 0.00 15.63

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (6.19) (0.00) (0.00) (23.45) (38.41) (21.54) (4.56) (0.00) (0.00) (0.00) (29.26)

B+ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.44 17.78 37.78 8.89 6.67 0.00 0.00 24.44

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (7.73) (27.53) (28.55) (17.79) (23.26) (0.00) (0.00) (21.96)

B 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.29 2.86 57.14 11.43 1.43 2.86 20.00

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (7.84) (12.71) (28.74) (18.14) (8.57) (6.81) (20.06)

B- 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.26 2.13 8.51 59.57 14.89 4.26 6.38

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (14.33) (7.17) (19.50) (37.12) (27.39) (10.03) (17.68)

CCC/C 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 22.73 36.36 27.27 13.64

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (33.01) (32.20) (24.36) (26.58)

Numbers in parentheses are weighted standard deviations. Sources: S&P Global Fixed Income Research and S&P Global Market Intelligence's CreditPro®.

The negative correspondence between ratings and defaults in the Nordic region holds true over



time, as the cumulative average default rates illustrate (see Tables 12 and 13). On average, from1995 to 2017, 'BBB' rated Nordic issuers had a 0.20% default rate in the first year after they wereinitially rated and 0.34% in the second year. Issuers rated 'B' recorded a default rate of 2.47%, onaverage, in the first year, 5.2% in the second, and so on.

Table 12

Comparison Of Corporate Cumulative Average Default Rates (%)

--Time horizon (years)--

From/to 1 2 3 4 5 6 7 8 9 10

Nordic (1995-2017)

AAA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

A 0.11 0.22 0.22 0.22 0.22 0.22 0.22 0.22 0.22 0.22

BBB 0.00 0.34 0.53 0.73 0.95 1.18 1.42 1.69 1.97 2.28

BB 0.00 0.54 1.14 2.47 4.62 6.22 8.01 9.00 10.12 11.42

B 2.47 5.24 8.37 12.11 15.53 19.56 21.07 21.07 21.07 21.07

CCC/C 27.27 32.12 37.34 37.34 37.34 37.34 46.29 46.29 46.29 46.29

Investment grade 0.05 0.21 0.27 0.33 0.39 0.46 0.53 0.61 0.70 0.79

Speculative grade 2.60 4.32 6.23 8.41 10.90 13.25 15.36 15.93 16.58 17.32

All rated 0.47 0.87 1.21 1.57 1.96 2.32 2.64 2.78 2.93 3.09

Global (1981-2017)

AAA 0.00 0.03 0.13 0.24 0.35 0.46 0.51 0.60 0.65 0.71

AA 0.02 0.06 0.12 0.22 0.32 0.43 0.53 0.60 0.68 0.75

A 0.06 0.14 0.24 0.37 0.51 0.66 0.85 1.01 1.17 1.34

BBB 0.17 0.49 0.84 1.26 1.70 2.13 2.50 2.87 3.23 3.58

BB 0.68 2.13 3.83 5.53 7.11 8.56 9.80 10.92 11.90 12.77

B 3.60 8.26 12.28 15.46 17.90 19.90 21.51 22.79 23.92 24.97

CCC/C 26.86 36.08 41.08 44.02 46.28 47.19 48.38 49.28 50.13 50.76

Investment grade 0.10 0.26 0.45 0.68 0.92 1.17 1.40 1.61 1.82 2.03

Speculative grade 3.75 7.31 10.39 12.91 14.96 16.65 18.06 19.24 20.28 21.22

All rated 1.50 2.95 4.22 5.29 6.18 6.94 7.57 8.12 8.60 9.05


Table 13

Nordic Corporate Cumulative Average Default Rates By Rating Modifier (1995 - 2017)(%)


Rating 1 2 3 4 5 6 7 8 9 10

AAA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

AA+ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00



Table 13

Nordic Corporate Cumulative Average Default Rates By Rating Modifier (1995 - 2017)(%) (cont.)


Rating 1 2 3 4 5 6 7 8 9 10

AA- 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

A+ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

A- 0.26 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53

BBB+ 0.00 0.36 0.36 0.36 0.36 0.36 0.36 0.36 0.36 0.36

BBB 0.00 0.00 0.50 1.05 1.65 2.30 2.30 2.30 2.30 3.33

BBB- 0.00 1.12 1.12 1.12 1.12 1.12 2.83 4.77 6.94 6.94

BB+ 0.00 0.00 0.00 0.00 0.00 2.33 5.04 5.04 5.04 5.04

BB 0.00 0.00 1.72 3.65 8.24 10.79 10.79 10.79 10.79 10.79

BB- 0.00 1.61 1.61 3.71 5.85 5.85 8.32 10.94 13.82 17.01

B+ 0.00 0.00 2.94 6.41 6.41 6.41 6.41 6.41 6.41 6.41

B 2.86 7.71 11.56 14.02 17.20 17.20 17.20 17.20 17.20 17.20

B- 4.26 6.53 8.93 14.29 20.00 30.00 33.69 33.69 33.69 33.69

CCC/C 27.27 32.12 37.34 37.34 37.34 37.34 46.29 46.29 46.29 46.29

Investmentgrade

0.05 0.21 0.27 0.33 0.39 0.46 0.53 0.61 0.70 0.79

Speculativegrade

2.60 4.32 6.23 8.41 10.90 13.25 15.36 15.93 16.58 17.32

All rated 0.47 0.87 1.21 1.57 1.96 2.32 2.64 2.78 2.93 3.09


Gini Ratios And Lorenz Curves

A quantitative measure of ratings performance is helpful in indicating that the relative rankordering of ratings in the Nordic region is consistent across various time horizons. To measureratings performance or ratings accuracy, the cumulative share of issuers by rating is plottedagainst the cumulative share of defaulters in a Lorenz curve to render the accuracy of their rankordering visually (see charts 7-9). For definitions and methodology, refer to Appendix IV at the endof the report. Our calculations indicate that the one-year transition to default in the Nordic regionshows an average one-year Gini coefficient of 88.3%, a three-year of 80.9%, and a five-year of82.5% (see Table 14). If corporate ratings only randomly approximated default risk, the Ginicoefficient would be zero. On the other hand, if corporate ratings were perfectly rank-ordered sothat all defaults occurred only among the lowest-rated issuers, the Lorenz curve would capture allof the area on the graph above the diagonal, and its Gini coefficient would be 1.



Table 14

Corporate Gini Coefficients By Region (%)

--Time horizon--

Region One year Three years Five years Seven years

Global 82.42 75.04 71.68 69.45

U.S. 80.73 72.87 69.42 67.31

Europe* 89.88 84.61 82.10 77.34

Nordic* 88.31 80.88 82.52 82.29

Numbers in parentheses are standard deviations. Europe and Nordic averages and standard deviation calculated for 1995-2017. Sources: S&PGlobal Fixed Income Research and S&P Global Market Intelligence's CreditPro®.

As expected, the Gini coefficients decline as the time horizon lengthens because longer timehorizons allow for more time for credit degradation among higher-rated issuers. In the one-yearNordic Lorenz curve, for example, 90.9% of defaults occurred in the speculative-grade category('BB+' or lower), while ratings of 'BB+' or lower constituted only 16.3% of all Nordic corporateissuers (see chart 7). The five-year Lorenz curve shows that speculative-grade issuers constituted77.4% of defaulters and only 13.3% of the entire sample (see chart 9). If the rank ordering ofratings had little predictive value, the cumulative share of defaulting corporate issuers and thecumulative share of all issuers would be nearly the same.

Chart 7



Chart 8

Chart 9



Nordic Green Finance Looks Set For SustainableGrowthAugust 16, 2018

Key Takeaways

- This is likely to be another record breaking year for green bond issuance in the Nordicregion.

- We expect the region's new issuance to top the US$10 billion threshold, with ananticipated increase in issuance of at least 20%.

- Sweden's new Climate Act aims for the nation to reach carbon neutrality by 2045, whichcould stoke further demand for green finance.

The Nordic region's progressive environmental initiatives show no sign of abating. This year, weforecast the region could break through the US$10 billion threshold of new green bond issuance: itwas already US$8.2 billion at the end of July, nipping at the heels of 2017's $8.3 billion for thewhole year. We have also seen total cumulative green issuance from the region (Denmark, Finland,Iceland, Norway, and Sweden) soar to almost $28 billion as of July 2018, already 30% up on 2017'stotal (source: CBI dataset July 2018).

That the Nordics have embraced green finance comes as no great surprise given the region'sstrong track record in sustainability generally. Sweden ranks first in the BertelsmannFoundation's global index of countries' progress in Sustainable Development Goals (SDGs),followed by Denmark, Finland, and Norway. SDGs focus on sustainable development that aims toend poverty, protect the planet, and improve living conditions, education, and health globally. TheNordics' leadership in these areas complements their focus on green finance; sustainableinfrastructure projects in the region are growing apace.

The Nordics Are Punching Above Their Weight In Green Bonds

Global cumulative green bond issuance totaled $243 billion year-end 2017, and 6.7% of this wasfrom the Nordic region (see chart 1). This is sizable compared to the Nordic economies' GDP as aproportion of global GDP (Sweden and Norway account for 0.67% and 0.52% of the globaleconomy, and Finland and Denmark even less, according to the World Bank). As a proportion of theEuropean green bond market, the Nordics account for just over 18% (see chart 2).

Nordic Green Finance Looks Set For SustainableGrowthAugust 16, 2018

PRIMARY CREDIT ANALYST

Jessica Williams

London

(44) 20-7176-3884

[email protected]

SECONDARY CONTACT

Michael Wilkins

London

(44) 20-7176-3528

[email protected]


Chart 1 Chart 2

Within the Nordic region Sweden dominates with 58% of total cumulative issuance, or US$ 27.7billion as of July 2018. Norway follows with 23% of the share.


Nordic Green Finance Looks Set For Sustainable Growth

Chart 3

The Nordics have a diverse range of green bond issuers. Besides local and regional governments(LRGs) and government-related entities (GREs), the notable variety of corporate issuance comesfrom forestry companies and real estate companies with a green agenda among others. Chart 4shows the split of funds according to project type. The majority of bonds finance a range ofprojects--encompassing say land use, transport, and building projects--so we have labeled themmultipurpose because we have no further clarity as to how the proceeds have been allocatedbetween projects. Despite this caveat, green buildings make up the second largest slice of thechart, which is consistent with the prevalence of green real estate issuers in the Nordics.



Chart 4

Nordic green building issuance is on the rise

Real estate green issuance has been strong so far in 2018. Jernhusen AB (A/Stable/A-1), aSwedish state-owned real estate company in the transport sector, has issued three small Swedishkrona (SEK) green bonds, two in April and one in June. Jernhusen owns, develops, and managesthe main railway stations, station areas, maintenance depots, and freight terminals along theSwedish railway network.

Vasakronan, one of the largest office owners and developers in Stockholm, continues to top theSwedish real estate leaderboard and has been a repeat issuer of green bonds since 2013.

Table 1

2018 Nordic Real Estate Issuers and Total Amounts Issued as of July 2018

Issuer Amount Issued In USD

Vasakronan 569,277,297

Kungsleden AB 327,437,800

Jernhusen AB 195,834,687

Klovern 107,274,600



Table 1

2018 Nordic Real Estate Issuers and Total Amounts Issued as of July2018 (cont.)

Issuer Amount Issued In USD

Vacse AB 57,485,801

Source: Climate Bonds Initiative

Green Bonds Increase Funding Diversification

The high credit quality of Nordic GREs and LRGs attracts investors with a low risk appetite. RatedNordic public entities are mostly in the 'AAA' and 'AA' categories. Green bonds are allocated toenvironmentally responsible assets, while this is not necessarily the case for traditional bonds.Also, green bond issuance is often oversubscribed and investors keep pointing to a scarcity ofsupply (for example, Finland-based Municipality Finance's first green bond issuance in 2016attracted nearly 50 investors, many that had never invested in the entity before).

As investors and issuers become more environmentally aware, we expect the demand forpublic-sector green bonds in the Nordic region to mount. Nordic LRGs are strongly committed tosustainable new housing, renewable energy, pollution reduction, and green public transport aswell as eco-friendly water and waste management, which are all clear candidates for greenfinancing.

Given that green bonds issued by the Nordic public sector are still relatively scarce and we expectinvestor appetite to grow, this could attract a wider and more diverse range of investors. Wetherefore believe green bonds could give the Nordic public sector access to a more diverse globalfunding base with potentially longer maturities in financing. With strong investor interest,evidence of differences in pricing and maturities between green and normal bonds are emerging inthe Nordic capital markets.

S&P Global Ratings Green Evaluation

In 2017 we published our green evaluation of the City of Gothenburg's Swedish krona (SEK)1 billion 2016 bond issuance. The proceeds are solely dedicated to financing greenprojects, as defined within the city's environmental framework, with projects in renewableenergy, energy efficiency, public transportation, waste management, water treatment, andsustainable housing. The bond scored an overall green evaluation of 67 out of 100--or E2 onour scale of E1 (highest) to E4 (lowest)--reflecting an average score in transactiontransparency and a very strong score in governance. It has a strong overall environmentalimpact score, as the bond proceeds will go to projects with high decarbonization potential.

For further details please see "Green Evaluation: City of Gothenburg," published June 19,2017.



Swedish Policy Will Boost Green Bond Issuance

In November 2017, Swedish prime minister Stefan Löfven and French president EmmanuelMacron signed the French-Swedish strategic partnership for innovation and green solutions. Thisidentifies green finance as one of the top-four priorities of cooperation between the two nationsthat will contribute to the fight against climate change.

Even more significantly, Sweden's Climate Act entered into force in January this year. Under theact, the government's climate policy must be based on climate goals set by an independentClimate Policy Council that sets out a framework for how policies are to be carried out. The actstates that the government must present a climate report every year in its budget bill and draw upa climate policy action plan every fourth year to describe how climate goals are to be achieved. Theoverarching ambition of the plan is for Sweden to become a net zero greenhouse gas emitter by2045, an ambitious goal that supports the Paris Agreement to which all nations are currentlysignatories (the U.S. has expressed its intention to withdraw but the earliest date that this will bepossible is Nov. 4, 2020). Sweden's Climate Act legislation was passed by its parliament in Junelast year by 254 votes to 41, showing Sweden's clear political appetite for progressiveenvironmental targets.

Impact reporting

Ten Nordic public sector issuers collaboratively produced a position paper on Green Bond ImpactReporting in October 2017 titled "Nordic Public Sector Issuers: Position Paper on Green BondsImpact Reporting." The guidance covers eight project types such as renewable energy, greentransport, green buildings, and water and waste management. It recommends annual impactreporting, as well as pre- and post-project impact reporting. These recommendations broadlyalign with the International Capital Market Association's Green Bond Principles and S&P GlobalRatings' Green Evaluations but also provide further suggestions about baselines and points ofreference for the Nordic region and how to draw project boundaries for reporting.

Conclusion

With strong demand and a rapidly increasing supply of green bonds in the Nordics and furtherstrong signals from policy makers and investors, there is reason to be confident about continuedNordic success in the area of green finance. Sweden will continue to be the leader of the pack withlegislation that is some of the most ambitious globally but collaborative public sector initiativesacross the region such as the NPSI Position Paper could see other players such as Norway andDenmark start to close the gap.

Related Commentaries

- The Nordics Continue To Blaze The Trail For Green Bonds, Dec. 12, 2017

- Frequently Asked Questions: S&P Global Ratings' Analytical Approach In Evaluating GreenTransactions, Dec. 6, 2017

- Green Evaluation Analytical Approach, April 26, 2017

- Green Evaluation: City of Gothenburg, June 19, 2017



Can A Housing Market Crash Cripple Sweden'sEconomy?June 26, 2018

The marked decline in house prices in Sweden late last year has rekindled concerns about thecountry's significant and typically variable-rate household debt, which in a severe housing marketcrisis could exacerbate the consequences for the economy. House prices increased by astaggering 240% or so over the previous 10 years. But Sweden's housing market remainedrelatively unscathed through the 2008-2009 financial crisis, unlike in Denmark, where the marketis otherwise similar. So what effect could a 30% drop in house prices have on Sweden'smacroeconomy and financial system?

Here, we simulate the effects of such a 30% decrease in house prices spread over two years fromthe third quarter of 2018, assuming no major policy intervention except to prevent a rapid rise ininflation. The results of our scenario analysis indicate that household spending reduces, but netexternal trade in the currently benign external environment will prop up the economy. Also, asdomestic consumption falls, businesses suffer and unemployment surges, thereby reducing thegovernment's revenues from taxes while increasing its social transfer expenses. These factorswould weaken Sweden's general government balances, eating into its fiscal buffers. In addition,the Swedish krona would depreciate, leading to an increase in imported inflation that could provedifficult for the central bank to rein in.

Key Takeaways

- S&P Global Ratings' stress scenario shows that a 30% fall in house prices would weighheavily on Sweden's economic and fiscal positions.

- As loan to value ratios rise and the interest burden increases, households wouldconsume much less and businesses would struggle with lower demand.

- But a favorable external environment, lower wage costs, and a weaker krona wouldboost net external trade, mitigating the effects of weak domestic demand on growth.

- What's more, in our view, the financial sector will remain stable, since Swedish bankshave ample capital reserves to absorb losses, as well as high profit margins to deal withrising funding costs.

- In particular, excess collateral backing Swedish residential mortgage bonds should beable to cushion the effects of a severe housing market stress on loan pools.

Can A Housing Market Crash Cripple Sweden'sEconomy?June 26, 2018


Gabriel Forss

Stockholm

(46) 8-440-5933

[email protected]

SECONDARY CONTACTS

Boris S Glass

London

(44) 20-7176-8420

[email protected]


Stockholm

+ 46 84 40 5906

[email protected]

Casper R Andersen

London

(44) 20-7176-6757

[email protected]

RESEARCH CONTRIBUTOR

JOHANNA MELINDER

Stockholm

+ 46 84 40 5926

[email protected]

www.spglobal.com/ratingsdirect June 26, 2018 1

In contrast to this hypothetical stress scenario, we've outlined our base-line expectations forSweden and its economy in "Sweden 'AAA/A-1+' Ratings Affirmed; Outlook Stable," publishedMarch 2, 2018, and "Banking Industry Country Risk Assessment: Sweden," published Nov. 24,2017, on RatingsDirect.

Large Variable-Rate Mortgage Debt Is A Key Risk

Several factors contributed to the substantial rise in Swedish house prices in 2005-2016 (seechart 1). Some are structural, such as the pronounced shortage of housing, particularly in thecapital city of Stockholm but also in other larger cities, and incentives to take on mortgage debt,including the tax-deductibility of interest payments. Demographic trends and urbanization havealso fueled housing demand in key cities. In addition, structurally low supply of rental housinguntil recently has meant that alternative housing solutions are still scarce. Another key factor isrobust real wage growth in line with Sweden's strong economic development, combined with verylow interest rates.

Chart 1

At the same time, household debt kept climbing, and represented 187% of disposable income atthe end of last year, the seventh highest among all countries in the OECD. Amid thelow-interest-rate environment and strong real income, interest expenses remained quite lowcompared with income, making loans more attractive. Moreover, about 70% of mortgage loans inSweden are at variable interest rates. The combination of high debt and variable interest ratesputs households at risk because, as interest rates increase, so too do households' debt-servicingneeds.

Households' high aggregate net wealth is therefore an important mitigant, although arguably anotable portion of it is tied up in real estate and pension savings, which are not liquid (see chart 2).


Can A Housing Market Crash Cripple Sweden's Economy?

Chart 2

The FSA has taken measures to curb the increase in debt, most recently by introducing adebt-to-income brake at 450%, which--since March 1, 2018--requires additional amortization ifloans exceed gross household income by 4.5x. Fiscal measures that could address theimbalances--such as the reduction or elimination of tax deductibility of interest payments, orreintroduction of property taxes--are still under discussion, but haven't yet gained politicaltraction.



Chart 3

The Assumptions Underlying Our Stress Scenario

Our hypothetical scenario envisages a 30% peak-to-trough decline in Swedish house prices fromthe third quarter of 2018, spread over two years. This decrease is similar to that seen in Denmarkbetween the 2007 peak and 2009 trough. To complete our scenario, we make further assumptions:

- As market participants worry about the impact of the housing market deterioration on the widereconomy, share prices fall by 15% over a two-year period.

- For the same reason, the krona depreciates by about 10%.

- The Riksbank will face a dilemma: on the one hand, how to alleviate inflationary pressurescreated by the krona's depreciation; and, on the other hand, how to support the flaggingeconomy at the same time. We assume that, considering the trade-off, the Riksbank will raiseinterest rates, but only moderately, by about 90 basis points (bps).

- Mortgage interest rates rise by 160 bps on the back of higher central bank rates, but alsobecause lenders increase their risk premium or pass on the higher funding costs ascovered-bond funding spreads increase.

We use these assumptions, along with further technical assumptions and our judgment, in OxfordEconomics' Macroeconomic Model.



What The Results Indicate

Key Scenario Results

--GDP growth (%)-- --CPI (%)----Unemployment rate

(%)----Exchange rate, per U.S. $

(EOP)--

Baseline Scenario Diff. Baseline Scenario Diff. Baseline Scenario Diff. Baseline Scenario Diff.

2.5 1.8 6.7 8.2

2018 2.7 2.5 (0.2) 1.7 1.9 0.2 6.4 6.4 0.0 8.2 8.8 0.6

2019 2.2 1.3 (0.9) 2.4 3.0 0.6 6.3 6.7 0.4 8.2 9.0 0.8

2020 2.0 1.3 (0.7) 2.6 2.7 0.1 6.2 7.4 1.2 8.2 8.7 0.5

2021 2.2 1.7 (0.5) 2.9 2.8 (0.1) 6.2 7.9 1.7 8.2 8.3 0.1

CPI--Consumer price inflation. EOP--End of period. Source: S&P Global Ratings.

Rising mortgage payments stifle household demand and GDP growth

A significant drop in house prices hurts household balance sheets by reducing wealth andincreasing leverage, creating an environment that quells consumption. The reduction in householdspending is exacerbated by somewhat higher inflation on the back of a weaker krona, higherunemployment (up by 1.8 percentage points at its peak), and more modest wage growth.Importantly, higher mortgage costs, due to the increase in interest rates, will also squeezehousehold incomes, which consequently reduce spending. Similarly, even households living intenant-owned associations might see their monthly fees increase as a result of their association'slarger debt-service obligations.

In principle, high savings can cushion the effect of a housing market decline on household balancesheets and cash flows. But, since the distribution of wealth is uneven, young households with lesssavings could be worse off than others, possibly even entering a negative equity position, withmost of their mortgage-loan principal outstanding and house prices 30% lower. Such householdscould cut back on consumption more than those with larger incomes and more-liquid savings. Onthe other hand, households typically react to financial stress by increasing savings as aprecaution.

Lower private consumption, which, in our scenario, decreases by 1.9% in 2019, is a major reasonfor the slowdown in overall GDP (see chart 4). In addition, investment is quick to contract,especially in the residential real estate construction sector.



Chart 4

The reduction in domestic demand translates into lower imports, while the weaker local currencysupports a surge in exports. In fact, the resulting boost to net trade acts as the main shockabsorber in our scenario, counterbalancing much of the contraction in domestic demand in2019-2020 and thus keeping GDP growth in positive territory. This is possible because, in ourscenario, the external environment remains benign, in contrast to the Danish housing marketcrash, which coincided with the global financial crisis, driving down external demand.

Public finances deteriorate as tax receipts diminish and social spendingincreases

Lower domestic demand following a housing market stress erodes the profitability of Swedishindustries. It can also lead to a weaker business environment and increased layoffs, resulting inhigher unemployment (see chart 5). In conjunction with sluggish wage growth, we see thissituation translating into lower government revenues from income and corporate tax. In turn, thisstrains public finances, already burdened by the increase in social transfers stemming fromhigher unemployment. Moreover, the resulting rise in income inequality and mounting socialtensions, aside from disrupting the social fabric, could lead to a further increase in fiscalspending.



Chart 5

What's more, the tax deductibility of interest expenses can also affect the government's fiscalposition when interest rates go up. As households' mortgage interest costs increase, thetax-deductible amount increases as well, leading to higher costs for the government, which in2016 amounted to SEK17 billion. The Swedish Institute for National Economic Research estimatesthat, if mortgage interest rates rise to 4.9% by 2021 (roughly two percentage points above thepolicy rate the Riksbank expects for that year), the government's overall tax-deduction costs couldalmost double, assuming mortgage debt continues to increase. Moreover, decreasing houseprices imply lower profit on the sale of property, meaning that households will pay less capitalgains tax, with a corresponding drop in tax revenue for the government.

Sweden's public finances are currently very strong, with recurring general government surplusesand a low public debt burden. In our stress scenario, this strong position swings into deficits aswide as 2.5% of GDP by 2021, and those deficits remain at about 2% of GDP through 2024.Notably, we anticipate that the government would likely use some of its resources to addressfiscal slippages resulting from higher expenditure and lower revenue.

Economic, fiscal, and monetary metrics weaken

The severe stresses in our hypothetical scenario result in erosion of Sweden's economicperformance and public finances. Although we don't assume any major policy intervention torelieve the associated pressures, we think the effectiveness of policymaking would be tested,



should Sweden experience a housing market crisis similar in magnitude to that in our scenario.The government would seek to avoid a significant decline of fiscal or external performance, andprevent a buildup of socioeconomic imbalances. The outcome of the sovereign's policy responseswould therefore be key in evaluating its longer-term ability to handle fiscal and economicpressures.

Swedish wealth levels back up our assessment of the country's economic resilience. Even thoughthe economy may take a hit from deteriorating business conditions and rising unemployment, thecountry's underlying macroeconomic fundamentals remain sound, with growth staying positivethroughout our stress scenario.

However, excluding the impact of automatic stabilizers, the general government's fiscal positionturns into a deficit that widens as a consequence of the downturn. Sweden's currently very lowpublic debt provides substantial financial flexibility, but we foresee this leeway becomingprogressively narrower, resulting in a weakened fiscal position.

Banking sector losses increase from historical lows

In our base case, we expect economic risks for Swedish banks will remain low through 2020,despite moderate imbalances in the housing market (see "Banking Industry Country RiskAssessment: Sweden," published Nov. 24, 2017, and "Banking Risk Indicators: April 2018 Update,"published April 16, 2018). This is because we anticipate that, after the recalibration in 2017-2018,house prices will increase by about 2.6% yearly in real terms through 2020. Credit losses in thebanking sector remained low in Sweden over 2011-2017, at 12bps of total loans, and we expectthey will average 13bps of loans (2bps for retail loans only) in 2018-2020.

Swedish mortgage lenders, in their current mortgage affordability assessments, typically apply astressed 7% interest rate. Hence, while we conclude that our hypothetical severe stress scenariowould lead to a contraction of households' disposable income, we expect most households wouldcontinue paying their mortgage loans. However, we expect the performance of unsecuredconsumer loans (6.2% of total household loans) would deteriorate, resulting in higher credit lossesfor banks.

That said, we also expect households would reduce consumption substantially to continueservicing their mortgage debt. Therefore, we believe losses on corporate exposures would have agreater impact on Swedish banks' bottom lines than residential mortgage loans. Lower consumerspending would lead to increased credit losses for businesses such as retailers, hotels,restaurants, consumer goods manufacturers, and small and midsize enterprises involved inconstruction. In particular, we think the construction sector and housing developers would take adirect hit if house prices plummet.

Looking back, we note in addition that the recent house price decline in Denmark had a limitedimpact on bank losses, which peaked at only 1% of outstanding loans in 2009.

Bank ratings could come under pressure

A housing market crisis could lead us to lower the anchor that starts our ratings on Swedish banksby several notches, resulting in downgrades. This is because we use our Banking Industry CountryRisk Assessment (BICRA) to determine the anchor, and we would review our BICRA on Sweden toaccount for changes in banks' operating environment, including potential effects of developmentsin the housing market.

More specifically, our hypothetical stress scenario would have an impact on our assessment of



economic risks in our BICRA on Sweden. When an economy enters a correction phase, we assessthe likely impact on the banking sector over the coming two or three years as part of our review ofeconomic imbalances. For instance, in our BICRA on Denmark, we concluded that the 2007-2008house price correction would have a limited impact on the banking sector. If we applied the sameset of factors to the Swedish market today, they wouldn't change our view of economic imbalancesin our Swedish BICRA review. A higher expected impact, however, similar to what we foresaw in2011 after the 37% fall of house prices in Spain, would put additional pressure on our Swedishbank ratings.

Beyond our expectation of higher bank losses, various additional factors could lead us to revisedown the anchor for our Swedish bank ratings by several notches. They include our view of:

- Higher overall economic risk, based on changes in the sovereign's creditworthiness.

- Increased credit risk in the economy, for instance, due to a reduction of Swedish households'net wealth if the stock market contracts and debt increases as a share of disposable income.

- Reduced stability in the banking sector, if profitability falters under slower loan growth andhigher credit losses.

- Less favorable funding conditions if lower confidence in the housing market and banking sectorrestrict banks' access to funding in domestic and international capital markets.

Furthermore, we would also assess the potential bank-specific impact of this scenario on acase-by-case basis, which could lead to additional rating pressure. For instance, we would revieweach bank's loss experience and performance compared with that of domestic peers and banks ina comparable economic environment, which could lead to positive or negative rating actions.

As economic risks increase, we would also apply higher capital charges for credit and equityexposures in our assessment of Swedish banks' risk-adjusted capital adequacy. While creditlosses and possibly higher funding costs would reduce banks' ability to build capital, highercapital charges would also weigh on our currently high capital and earnings assessments forSwedish banks. We view the sector's comparatively high payout ratios (75%-97% of profits in2017) for the largest banks as an illustration that Swedish banks would have the means to rebuildcapitalization internally in an adverse scenario similar to ours.

Covered bond issuers stay resilient to falling house prices

Sweden's covered bond market provides a key source of financing for residential mortgage loans.A housing market crisis in Sweden could affect several factors supporting our outstanding coveredbond ratings. We have already explored the impact of various house price scenarios on our ratingsand on overcollateralization levels in Sweden, and found that our covered bond ratings would beimpervious to a 30% fall in house prices (see "Ratings On Swedish Covered Bonds Could WithstandModerate House Price Declines," published Jan. 7, 2015). Since then, the weighted average loan tovalue of cover pools has been stable, or has improved. We therefore expect covered bond issuersto remain resilient. For our 'AAA' credit analysis, we already assume a fixed market value declineof 40%--which is greater than in the stress scenario--with no impact on our covered bond ratings.We would increase this market value decline assumption if we believe the mortgage market to beovervalued.

The effect of house price fluctuations during normal economic cycles forms part of our currentanalysis of covered bonds in Sweden. In particular, the calculation of projected losses considersthe degree of overvaluation in the market through the calculation of expected market-valuedeclines. We generally estimate the level of overvaluation of the relevant property market by



comparing the prevailing house-price-to-income ratio against its long-term average and,currently, we see a comparatively high level of overvaluation in the Swedish market.

A downgrade of an individual Swedish issuer could have an impact on our covered bond ratingsdepending on its severity. Our current ratings on Swedish issuers mean that the covered bondratings all benefit from unused notches, making them resistant to at least a one-notch downgradeof the issuer. We regularly review our covered bond ratings and publish information on unusednotches (see "Global Covered Bond Characteristics And Rating Summary Q2 2018," publishedJune 13, 2018).

The Deciding Factors: Policy And External Environment

The impact of a housing market crisis would hold substantial macroeconomic consequences forSweden, but would not jeopardize its financial stability, in our view. Our stress test shows howhouseholds' high variable-rate debt represents a vulnerability to the economy. In our adversescenario, households feel the weight of increased debt servicing costs and reduced wealth, andtheir ensuing spending cuts have a visible impact on the real economy. This we believe would leadto higher losses for the banking sector, putting pressure on our bank ratings. However, Sweden'seconomic sectors are on solid ground and have more than enough resources to absorb the impactand support a recovery.

If the housing market were indeed to collapse, the real impact would depend on the specificfactors at work at that time. We believe the Swedish economy has breathing room to contend withinternal shocks. Therefore, the key to any recovery, following our scenario, would be the state ofthe external environment: in other words, ongoing external demand for Swedish goods andservices. Hence, if Sweden's housing market and external demand deteriorated at the same time,the repercussions for the economy and government finances would be more severe than in ourscenario. In that situation, the government could have fewer policy response options.

Related Criteria

- Sovereign Rating Methodology, Dec. 18, 2017

- Methodology And Assumptions: Assessing Pools Of European Residential Loans, Aug. 4, 2017

- Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions, Aug. 8,2016

- Covered Bonds Criteria, Dec. 9, 2014

- Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013

- Banks: Rating Methodology And Assumptions, Nov. 9, 2011

- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

Related Research

- Global Covered Bond Characteristics And Rating Summary Q2 2018, June 13, 2018

- Banking Risk Indicators: April 2018 Update, April 16, 2018

- Sweden 'AAA/A-1+' Ratings Affirmed; Outlook Stable, March 2, 2018



Nordic Bank Ratings Continue To Stand TallAugust 16, 2018

Key Takeaways

- Nordic banks have high ratings in global comparison, underpinned by a stable operatingenvironment, sound earnings and high operational efficiency, elevated risk-adjustedcapitalization, and good access to stable funding.

- Our previous concerns are receding about imbalances in the Swedish and Norwegianhousing markets because we expect stricter amortization requirements and an increasein housing supply will cool price growth.

- The Danish banking sector will in our view benefit from a supportive economy andgradually decreasing private-sector leverage, which could lead us to raise ratings in thenext two years.

- Nordea Bank's move to Finland in late 2018 will more than double the size of Finnishbanking sector, without, in our view, changing the competitive dynamics or shakingfinancial stability in the country.

- Resolution regimes are progressing across the Nordic region, and, followingannouncement of MREL, we expect systemic banks to accelerate issuance ofbail-in-able debt once there is a new asset class in creditor hierarchies is introduced.We already incorporate ALAC build-up in our ratings or outlooks on systemic Nordicbanks.

Our ratings on large Nordic banks are among the highest in the world among peers, as they havebeen for several years now. This reflects a stable operating environment in terms of economicconditions and industry-specific factors such as regulation, transparency, competitive landscape,capitalization, profitability, and access to stable funding. This results in high anchors, the startingpoint for S&P Global Ratings' Nordic bank ratings, which vary from 'bbb' in Iceland; 'bbb+' inDenmark; to 'a-' in Finland, Norway, and Sweden.

Our concerns, especially about housing market dynamics and household debt growth in Swedenand Norway starting in 2012 and up until 2017, have receded, mostly owing to macroprudentialmeasures financial regulators have taken and increased housing supply in capital cities andgrowth areas. Therefore, we expect the housing markets in both countries to stabilize in2018-2019 after the drop in housing prices they experienced in 2017. However, macroprudentialrules are not a panacea, and we remain vigilant for any signs of deterioration in banks'underwriting standards, acceleration in debt levels, or housing market slowdowns. The Danish

Nordic Bank Ratings Continue To Stand TallAugust 16, 2018

PRIMARY CREDIT ANALYSTS

Salla von Steinaecker

Frankfurt

(49) 69-33-999-164

[email protected]

Victor Nikolskiy

Moscow

(7) 495-783-40-10

[email protected]

Antonio Rizzo

Madrid

(34) 91-788-7205

[email protected]


Stockholm

+ 46 84 40 5906

[email protected]

Natalia Yalovskaya

London

(44) 20-7176-3407

[email protected]

SECONDARY CONTACT

Markus W Schmaus

Frankfurt

(49) 69-33-999-155

[email protected]

See complete contact list at end of article.


banking sector benefits from a high-income, stable economic and political environment and hasrecovered from the 2009 financial crisis, which exposed risks from overinvestment in commercialreal estate and agriculture as well as increasing household debt. Similarly, the Finnish economycontinues to boom after a prolonged recession in 2012-2015, and we expect demand forinvestments and credit to remain sound in the next two years. The Icelandic banking system haslargely absorbed shocks from the 2008 financial crisis, illustrated by declines in banks'nonperforming assets, low new loan losses, private-sector credit below 140% of GDP in 2017, andthe successful lifting of capital controls last year.

For Denmark, we recently revised to positive the economic risk trend, a component of our BankingIndustry Country Risk Assessment (BICRA), to reflect our view that private-sector leverage andhousehold vulnerability to interest rate hikes are receding and the share of amortizing loans isrising in the country. For the other four Nordic countries, economic risk trends are stable (sinceNovember 2017 in Sweden, March 2018 in Norway), factoring in our expectation that the operatingenvironment for the banking sector will remain supportive for earnings generation.

With the exception of Iceland, we consider all Nordic countries to have effective resolution regimesfollowing implementation of the EU Bank Recovery and Resolution Directive (BRRD) and theprogress resolution authorities have made in establishing resolution strategies and minimumrequirements for own funds and eligible liabilities (MREL). We expect systemically importantbanks to build up sizable additional loss-absorbing capacity (ALAC) over the ramp-up period oftwo-four years to meet MREL rules. Nordic governments are currently in the process ofimplementing changes to the creditor hierarchy as stipulated by EU Directive 2017/2399 throughthe introduction of a senior nonpreferred asset class. EU member states have to transpose theDirective into national law by Dec. 29, 2018. This will allow the banks to issue MREL-eligible debtthat statutorily ranks below senior unsecured debt. Therefore, we include uplift for ALAC supportinto the ratings on eight banks in the Nordics on the back of their existing buffers and tangibleplans to issue senior nonpreferred debt. We also reflect ALAC build-up in the positive outlooks ontwo banks in the Nordics. Resolution authorities in Sweden and Finland have also set MREL formidsize banks, but we will need more clarity about what resolution paths they will use andMREL-issuance plans before we decide on ALAC eligibility. Over the next two years, we expectIceland will implement a framework aligned with the BRRD and, with it, bail-in powers that couldchange our views about its resolution regime.

SWEDEN: Stable And High Ratings, Despite Vulnerability To HousingMarket Movements

Table 1

Banking Industry Country Risk Assessment: Sweden

Sovereign Rating* AAA/Stable/A-1+

BICRA Group / Anchor 2 / a-

Economic Risk / Trend 2 / Stable

Industry Risk / Trend 3 / Stable

Government Support Uncertain

Data as of July 31, 2018. *Rating on Sweden is unsolicited.


Nordic Bank Ratings Continue To Stand Tall

Chart 1

Our assessment of Sweden's BICRA implies a starting point of 'a-' for banks only operating inSweden. We consider that Swedish banks continue to benefit from a stable and low-risk operatingenvironment given our expectation that imbalances in the housing market are reducing. We viewthe Swedish economy as highly diverse and competitive, with high household incomes and netfinancial assets, but believe that high property valuations, in tandem with increasing householddebt, have created material economic imbalances. However, macroprudential measures andincreased housing supply have been in our view leading to a stabilization of house prices in 2018.We expect the further growth of economic imbalances to be limited by our expectation ofincreases in the repo rate through 2019, and we project banks' credit losses and nonperformingloans (NPLs) to remain low in the still low interest rate environment. This led us to revise ourassessment of the economic risk trend in Sweden to stable from negative in November 2017.Economic indicators have run above historic averages for the fourth consecutive year, and strongmacroeconomic outlooks in Sweden's major export destinations--the Nordics, EU, and theU.S.--bring confidence to near-term economic trends.

We consider Swedish banks, in global comparison, to benefit from a sound margin environment,with an average net interest margin of 1.23% between 2015 and 2017. They run efficientoperations in a country that is advanced in its transition to digital banking, as reflected in anaverage cost-to-income ratio of 46.2% between 2015 and 2017, leading to sound profitability andhigh capital levels despite elevated payout ratios (averaging 78% for the four largest banks in



2015-2017). However, a high share of foreign wholesale funding relative to customer depositsresults in relatively high confidence sensitivity for the sector, though we view Sweden'sprivate-sector debt capital markets and the government's willingness to ensure a well-functioningdomestic covered bond market as strengths.

Chart 2

All bank ratings in Sweden carry a stable outlook. The country's four systemically importantbanks, Nordea Bank AB, Swedbank AB, Svenska Handelsbanken AB, and SEB, are in the highestrating range of the top 50 largest banks in Europe, the Middle East, and Africa. We expect thesebanks to issue sizable amounts of bail-in-able debt in the next years to meet MREL requirements,and we therefore factor ALAC uplift into our ratings. We will continue to monitor the developmentof the country's resolution strategy for midsize banks before making decisions about their ALACeligibility. We currently view positive rating actions on Swedish banks as remote because weconsider an improvement in their already high bank-specific rating factors to be unlikely atpresent. We could lower the ratings if we were to see a material deterioration in asset quality or ifcapital ratios were to fall below current levels.



DENMARK: Most Ratings Are Above The Anchor Level, Maintained ByImproved Stability And Profitability

Table 2

Banking Industry Country Risk Assessment: Denmark

Sovereign Rating AAA/Stable/A-1+

BICRA Group / Anchor 3 / bbb+

Economic Risk / Trend 3 / Positive



Data as of July 31, 2018.

Chart 3

Our assessment of Denmark's BICRA implies a starting point of 'bbb+' for banks only operating inDenmark. The Danish economy is competitive, diverse, and expanding, and we expect economicand banking performance to remain high, supported by the economy's fiscal discipline and



growth-stimulating policies as well as by the banking sector's improved profitability. We have apositive view of the development of economic risks in Denmark, especially due to decreasinghousehold and corporate debt as a share of GDP to 115% and 110% in 2017 from 136% and 122%in 2011, respectively. Contributing to the trend of deleveraging are, in our view, initiatives such asreducing the tax deductibility of interest expenses, improving underwriting standards by limitingthe share of interest-only loans on banks' books, and making short-term interest rates on loansless attractive, which ultimately reduce incentives for higher indebtedness. At the same time, wenote that GDP has grown fairly steadily in the same period, and that Denmark still has one of thehighest gross debt levels globally.

We believe that Danish households will stay highly leveraged in global comparison, but we expecthigh household assets, the income-stabilizing social security system, increasing amortization andinterest fixing, as well as controlled corporate debt growth to keep supporting our assessment ofDenmark's economic risks. We see improved profitability in the banking sector as a result of lowercredit losses, cost efficiency measures, and improved loan margins, rather than a higher riskappetite. We note the sector's higher reliance than peers' on functioning wholesale markets, butwe acknowledge the continuing stability of the Danish covered bond market.

Chart 4

We currently have a positive outlook on four banks in Denmark-- Danske Bank A/S, Jyske Bank



A/S, Nykredit Realkredit A/S, and DLR Kredit A/S. The positive outlook on Jyske Bank reflects ourexpectation that it will build up sizable ALAC buffers in the coming two years to comply withrecently set MREL requirements for systemically important institutions. The outlooks on DanskeBank, Nykredit Realkredit A/S, and DLR Kredit A/S stem from our view of decreasing economicrisks in Denmark, associated with receding credit risk in the economy. Negative rating actions onthe country's commercial and mortgage banks are generally unlikely at the moment, givenimprovements in banks' performance and strengthening of their operating environment. Thespecialized financer Danmarks Skibskredit A/S continues to carry a negative outlook, whichreflects current difficulties in the international shipping and offshore markets as well as thepotential for deterioration in its asset quality metrics.

FINLAND: Ratings Remain Stable, With Support From Positive BusinessMomentum And Strong Risk-Adjusted Capitalization

Table 3

Banking Industry Country Risk Assessment: Finland

Sovereign Rating AA+/Stable/A-1+





Data as of July 31, 2018.



Chart 5

Our BICRA for Finland falls into the second strongest group of 2 (on a scale of 1-10 fromlowest-risk to highest), yielding an anchor of 'a-' for banks operating only in Finland. The countryhas an innovative, wealthy, and open economy, with mature institutions. After a prolongedrecession in 2012-2015, growth has picked up substantially. We forecast GDP growth to reach2.7% in 2018, supported by strong domestic and external demand. However, we project growth toslow to around 1.5% by 2020. We expect structural factors like low real wage growth and stillelevated unemployment to weigh on the economy. At the same time, we observe improvingconsumer confidence and household demand for unsecure lending. This, combined with stronggrowth in housing corporation loans, have led to a further increase in household debt to a record128.3%, though lower than that of Nordic peers. Still, we believe Finnish banks' asset quality willremain strong in the next two years, based on the sound financial positions of the household andcorporate sectors, banks' conservative underwriting standards (combined with stricter regulatoryrequirements), and the very low interest rate environment. However, a departure from prudentlending standards, combined with increases in interest rates, could strain households'debt-servicing capacity in the medium term. As such, we view the economic risk trend in Finlandas stable, with increased investments and net exports supporting robust economic growth, stablehouse prices, and a government committed to addressing structural reform needs.

We see industry risk in Finland as moderate, the competitive landscape as stable, and riskappetite as expected to remain moderate. The planned redomiciliation of Nordea to Finland in late



2018 will not in our view change the competitive situation in the Finnish banking sector becausethe bank's actual operations in other Nordic markets will remain unchanged. However, the movewill increase the size of Finland's banking sector to GDP to about 400% and could make it morevulnerable to external factors. We expect the banking sector to maintain stable and soundprofitability as well as strong capitalization, as reflected in a common equity tier 1 ratio of 20.5%for the banking sector and risk-adjusted capital ratios between 13.6% and 17.3% for the ratedbanks as of year-end 2017. We note that the Finnish regulator is preparing for the redomiciliationof Nordea and announced capital requirements for the group at the end of June 2018. The mainweakness for Finnish banks remains their structural funding gap and high dependence oninternational market funding, which make them vulnerable to confidence sensitivity. That said, thebanks continue to demonstrate good access to both secured and unsecured capital markets.

Chart 6

All ratings on Finnish banks carry a stable outlook, with the exemption of Bank of Aland, whichnow has a positive outlook reflecting our expectation of improving capitalization. Our ratingsincorporate the banks' already very strong risk-adjusted capitalization and sound asset quality(NPLs of 1.4% as of year-end 2017) in their lending books. We believe that upside for theirstand-alone credit profiles is limited because of the concentrated business models of thedomestic retail banks. We incorporate ALAC support into the ratings of OP Corporate Bank PLCbecause we believe that the wider OP Financial Group will issue bail-in-able debt in coming years



to support MREL. We are monitoring the development of resolution strategies for midsize bankssuch as Aktia Bank PLC and Savings Banks Group Finland (rated entity Central Bank of SavingsBanks Finland PLC) and clarity about their potential MREL issuance plans before assessingwhether they are eligible for ALAC uplift. We could lower the ratings on the banks if against ourexpectations we were to see a material deterioration in asset quality on the loan books or if banks'capital ratios were to fall below the current levels.

NORWAY: High Anchor Relative To Average SACP, Driven By TheCompetitive Landscape

Table 4

Banking Industry Country Risk Assessment: Norway

Sovereign Rating AAA/Stable/A-1+





Data of a July 31, 2018.

Chart 7



Our assessment of Norway's BICRA implies a starting point of 'a-' for banks only operating thecountry. Our assessment of low economic risk in Norway reflects its wealthy government,supported by returns from its global investment fund and a predictable economic environment.Loose monetary policy after the decline in oil prices in 2014-2015, coupled with a competitivemortgage market, triggered increases in property valuations and household debt. This hascontributed to material imbalances, and at year-end 2017 debt-to-disposable income in Norwaystood at 224%, which is higher than for other European countries. However, due to strictermacroprudential regulations and increased housing supply, house prices started to decrease in2017 (annual nominal house price growth has slowed to about 1% over 2017 from 10% in 2016).We anticipate that house prices will continue to contract over the next two years. In addition, weexpect that banks' losses related to oil and oil-related investments will continue decreasing andasset quality will continue to improve. As such we view the economic risk trend as stable.

We assess the industry risk trend as stable based on our view that the Norwegian bankingregulator has been proactive in maintaining solid capital and liquidity requirements over the pastseveral years. Lending margins have improved over the past year and now appear to be stabilizingat a slightly higher level, whereas in the past they had been under pressure. We think the sectorfaces a structural lack of deposits, but associated risks are to some extent offset by Norway'sexpanding bond market, bank funding from foreign parent companies, and probable governmentalliquidity support.

Chart 8



Our ratings on Norwegian banks reflect very strong capitalization and stable earnings on the backof improving asset quality, supported by gradual recovery in shipping and oil and oil-relatedsectors and a correction in house prices since 2017. Competition over mortgage loan market sharehas eased somewhat, as indicated by an improvement in lending margins over the past year.One-half of our ratings of Norwegian banks carry a positive outlook, indicating the possibility ofupgrade over the next 24 months due to:

- Implementation of a resolution regime in Norway and the buildup of MREL buffers in the case ofDNB Bank,

- A positive impact from the announced acquisition by Nordea on Gjensidige Bank throughstrengthening market positions of the merged operations of Gjensidige Bank and Nordea inNorway, and

- A gradual improvement in risk and business profiles, alongside an orderly wind-down in thecase of Eksportfinans ASA.

The outlook on two smaller financial institutions, Bank Norwegian AS and Eiendomskreditt AS, iscurrently negative, reflecting our view about risks related to the rather small and concentratedbusiness positions of both institutions, limiting revenue diversity compared with larger universalbanks, and a potential deterioration of asset quality due to rather high asset growth andconcentration on niche markets.

ICELAND: Ratings Are Stable At 'BBB+', Supported By Growth AndEased Market Access

Table 5

Banking Industry Country Risk Assessment: Iceland

Sovereign Rating A/Stable/A-1

BICRA Group / Anchor 4 / bbb




Data of as July 31, 2018.



Chart 9

Our view of the economic risks that Icelandic banks face remains stable. This reflects ourexpectation that economic growth will continue to support the banking sector amid signs thatoverheating is receding. We project real GDP growth to moderate to 2%-3% in 2018-2021, from3.6% in 2017 and 7.5% in 2016, driven by a slowdown in the expansion of the tourism sector andcompletion of some investment projects. The cooling of the economy will reduce the risk ofimbalances, which has been evident in the recent exchange rate as well as in labor and housingmarket trends. Specifically, house prices will continue to increase, but at a more tempered pacethan in 2017, with a growth rate of about 7% on average in 2018-2019, down from double-digitgrowth in the past two years.

The banking system has largely absorbed the shocks from the 2008 financial crisis as reflected bydeclines in their nonperforming assets, low new loan losses, private-sector credit below 140% ofGDP in 2017, and the successful lifting of capital controls in 2017. That said, we see risksstemming from a stronger Icelandic krona and wage inflation, which could translate into a loss ofeconomic competitiveness. The banks' credit risk may also start increasing, due to their sizableexposure to the real estate and tourism sectors and to consumer price index-linked mortgageloans, combined with fierce domestic competition from nonbank institutions (for example,pension funds).

We now see the trend for industry risk in Iceland as stable over our 24-month horizon. Since thefinancial crisis, Iceland has moved to a stronger regulatory system and adeptly managed the



recent lifting of capital controls, the restructuring of legacy banks, and the implementation ofmeasures to reduce economic volatility. Moreover, Icelandic banks have rebalanced their fundingmodel with domestic deposits, covered bonds, high shares of equity capital, and foreign wholesalefunding. However, the higher reliance on external funding, the current optimization of capitallevels, and a still relatively low core deposit base (about 35% on systemwide loans) increasinglyexposes banks to wholesale market volatility. Overall, we consider banks' risk appetite to be soundbut some risks could arise from growth in the lending activities of pension funds, whose growingpresence (about 18% of mortgage stock) is somewhat distorting the competitive landscape formortgages.

We consider the three large commercial banks as benefitting from a dominant market position inIceland, high capitalization, and comfortable liquidity buffers, which more than compensate fortheir geographical concentration in an inherently small and volatile country. The diversifiedbusiness model, high market shares, and benign economic environment should support highsingle-digit returns in the next two years, as the banks continue to optimize their capital levels. Weview Arion's recent initial public offering as a positive sign of investors' commitment to thebanking sector and we expect the government to start exiting the other two large banks.

Chart 10

All ratings on banks in Iceland carry a stable outlook. This considers our view of their sustainedcapital generation and ongoing reduction of their equity positions. We believe the banks willmaterially reduce capital over the next two to three years, likely without a fall in their



risk-adjusted capital (RAC) ratios below 15%. We also factor in our view of a still supportiveeconomic and operating environment in Iceland, which would translate into contained new creditlosses and low NPLs. We view positive rating actions as unlikely at this stage. On the contrary, wecould lower the ratings if capital declines beyond our expectations or we see signs of asset qualitydeterioration as a result of, for example, more aggressive underwriting or economic headwinds inthe country. At present, we do not regard the bank resolution framework as effective and, as such,do not include ALAC when rating Icelandic banks. Over the next two years, we expect Iceland willimplement a framework aligned with the EU's BRRD and, with it, bail-in powers that could changeour view. However, this is contingent on whether the authorities establish measures as well asindicate their willingness to protect senior bondholders and provide banks with the necessaryfunding and liquidity during a resolution, a period when market access is usually restricted.

Table 6

Nordic Banks' Ratings Score Snapshot Components

Long-Term ICR onoperatingcompany/Outlookor CreditWatch Anchor

Businessposition

Capitalandearnings

Riskposition

Funding andliquidity UGCP/SACP

Type ofSupport

No. ofnotches

ofsupport

Additionalfactors

Aktia Bank Plc A-/Stable a- Moderate(-1)

VeryStrong(+2)

Moderate(-1)

Avg/Adequate(0)

a- None 0 0

Arion Bank BBB+/Stable bbb Adequate(0)

VeryStrong(+2)

Moderate(-1)

Avg/Adequate(0)

bbb+ None 0 0

Bank NorwegianAS

BBB/Negative a- Weak (-2) VeryStrong(+2)

Weak (-2) Avg/Adequate(0)

bbb None 0 0

Bank of AlandPLC

BBB/Positive a- Weak (-2) Strong(+1)

Moderate(-1)

Avg/Adequate(0)

bbb None 0 0

Bonum BankPLC*

BBB/Stable a- Weak (-2) VeryStrong(+2)

Moderate(-1)

Avg/Adequate(0)

bbb+ None 0 (1)

Central Bank ofSavings BanksFinland PLC§

A-/Stable a- Moderate(-1)

VeryStrong(+2)

Moderate(-1)

Avg/Adequate(0)

a- None 0 0

DanmarksSkibskredit A/S

BBB+/Negative bbb+ Weak (-2) VeryStrong(+2)

Adequate(0)

BelowAvg/Strong(-1)

bbb None 0 1

Danske Bank A/S A/Positive bbb+ Strong(+1)

Strong(+1)

Adequate(0)

Avg/Adequate(0)

a ALAC 1 (1)

DLR Kredit A/S A-/Positive bbb+ Moderate(-1)

Strong(+1)

Adequate(0)

Avg/Adequate(0)

bbb+ ALAC 1 0

DNB Bank ASA A+/Positive a- Strong(+1)

Strong(+1)

Adequate(0)

Avg/Adequate(0)

a+ None 0 0

EiendomskredittAS

BBB/Negative a- Weak (-2) VeryStrong(+2)

Moderate(-1)

BelowAvg/Adequate(-1)

bbb None 0 0

EksportfinansASA

BBB+/Positive a- Moderate(-1)

VeryStrong(+2)

Moderate(-1)


bbb+ None 0 0



Table 6

Nordic Banks' Ratings Score Snapshot Components (cont.)


Businessposition

Capitalandearnings

Riskposition


Type ofSupport

No. ofnotches

ofsupport

Additionalfactors

Gjensidige Bank A/Watch Positive a- Weak (-2) VeryStrong(+2)

Moderate(-1)

Avg/Adequate(0)

bbb+ Group 2 0

HousingFinancing FundIbudalanasjodur

BB+/Stable bbb Weak (-2) Adequate(0)

Weak (-2) BelowAvg/Adequate(-1)

b+ GRE 3 0

Islandsbanki hf BBB+/Stable bbb Adequate(0)

VeryStrong(+2)

Moderate(-1)

Avg/Strong (0) bbb+ None 0 0

Jyske Bank A/S A-/Positive bbb+ Adequate(0)

Strong(+1)

Adequate(0)

Avg/Adequate(0)

a- None 0 0

Landsbankinn hf. BBB+/Stable bbb Adequate(0)

VeryStrong(+2)

Moderate(-1)

Avg/Strong (0) bbb+ None 0 0

LandshypotekBank AB


VeryStrong(+2)

Adequate(0)


a- None 0 0

LansforsakringarBank

A/Stable a- Moderate(-1)

Strong(+1)

Adequate(0)

Avg/Adequate(0)

a- Group 1 0

Nordea Bank AB AA-/Stable a- Strong(+1)

Strong(+1)

Adequate(0)

Avg/Adequate(0)

a+ ALAC 1 0

NykreditRealkredit A/S

A/Positive bbb+ Adequate(0)

Strong(+1)

Adequate(0)

Avg/Adequate(0)

a- ALAC 1 0

Oma SavingsBank PLC

BBB+/Stable a- Weak (-2) VeryStrong(+2)

Moderate(-1)

Avg/Adequate(0)

bbb+ None 0 0

OP CorporateBank PLC†

AA-/Stable a- Strong(+1)

VeryStrong(+2)

Moderate(-1)

Avg/Adequate(0)

a+ ALAC 1 0

SBAB Bank AB(publ)

A/Stable a- Moderate(-1)

Strong(+1)

Adequate(0)

Avg/Adequate(0)

a GRE 1 0

SkandinaviskaEnskilda BankenAB (publ)

A+/Stable a- Adequate(0)

Strong(+1)

Adequate(0)

Avg/Adequate(0)

a ALAC 1 0

SparbankenSkane


VeryStrong(+2)

Moderate(-1)

Avg/Adequate(0)

a- None 0 0

Storebrand BankASA

A-/Stable a- Weak (-2) VeryStrong(+2)

Moderate(-1)

Avg/Adequate(0)

bbb+ Group 1 0

SvenskaHandelsbankenAB

AA-/Stable a- Strong(+1)

Adequate(0)

Strong(+1)

Avg/Adequate(0)

a+ ALAC 1 0

Swedbank AB AA-/Stable a- Strong(+1)

Strong(+1)

Adequate(0)

Avg/Adequate(0)

a+ ALAC 1 0



Table 6

Nordic Banks' Ratings Score Snapshot Components (cont.)


Businessposition

Capitalandearnings

Riskposition


Type ofSupport

No. ofnotches

ofsupport

Additionalfactors

SparbankenSjuharad AB


VeryStrong(+2)

Moderate(-1)

Avg/Adequate(0)

a- None 0 0

Swedish ExportCredit Corp.

AA+/Stable a- Moderate(-1)

VeryStrong(+2)

Moderate(-1)

Avg/Adequate(0)

a- GRE 5 0

The MortgageSociety ofFinland

BBB/Stable a- Weak (-2) VeryStrong(+2)

Moderate(-1)


bbb None 0 0

Data as of July 31, 2018. *Ratings based on POP Bank Group. §Ratings based on Savings Banks Group Finland. †Ratings based on OP Financial Group. ICR--Issuer creditrating. ALAC--Additional loss-absorbing capacity. GRE--Government-related entity. UGCP--Unsupported group credit profile. SACP--Stand-alone credit profile.

Related Research And Criteria

Related Criteria

- Sovereign Rating Methodology, Dec. 18, 2017

- Banks: Rating Methodology And Assumptions, Nov. 9, 2011

- Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

- Use Of CreditWatch And Outlooks, Sept. 14, 2009

Related Research

- Banking Industry Country Risk Assessment Update: July 2018, July 24, 2018

- Four Icelandic Banks Affirmed On Supportive Economic Growth, But Weakening OperatingLandscape; Outlooks Stable, July 17, 2018

- Various Rating Actions Taken On Danish Banks On Signs Of Reducing Economic Risks; OutlooksPositive, July 13, 2018

- Banking Industry Country Risk Assessment: Norway, May 11, 2018

- DNB Bank, Eiendomskreditt, Bank Norwegian Ratings Affirmed On Stabilizing Domestic Risks;DNB Bank Outlook Now Positive, March 26, 2018

- Banking Industry Country Risk Assessment: Iceland, Feb. 21, 2018

- Second Chapter Of Nordic Resolution Regimes Approaches An End, But The Book Is NotComplete, Feb. 14, 2018

- Banking Industry Country Risk Assessment: Finland, Feb. 2, 2018



Contact List

PRIMARY CREDIT ANALYST PRIMARY CREDIT ANALYST PRIMARY CREDIT ANALYST

Salla von Steinaecker

Frankfurt

(49) 69-33-999-164

[email protected]

Victor Nikolskiy

Moscow

(7) 495-783-40-10

[email protected]

Antonio Rizzo

Madrid

(34) 91-788-7205

[email protected]

PRIMARY CREDIT ANALYST PRIMARY CREDIT ANALYST SECONDARY CONTACT


Stockholm

+ 46 84 40 5906

[email protected]

Natalia Yalovskaya

London

(44) 20-7176-3407

[email protected]

Markus W Schmaus

Frankfurt

(49) 69-33-999-155

[email protected]

SECONDARY CONTACT SECONDARY CONTACT SECONDARY CONTACT

Erik Andersson

Stockholm

+ 46 84 40 5915

[email protected]

Cihan Duran

Frankfurt

(49) 69-33-999-242

[email protected]

Joseph Godsmark

London

(44) 20-7176-7062

[email protected]

SECONDARY CONTACT

Olivia K Fleischmann

Stockholm

(46) 8-440-5904

[email protected]



Industry Report Card:

Nordic Corporates Are Still Powering AheadAugust 16, 2018

Key Takeaways

- The majority of our ratings on non-financial corporate entities in the Nordics areinvestment grade ('BBB-' or higher), and the median of 'BBB' indicates somewhatstronger credit quality than among corporates in EMEA or North America.

- The large proportion of stable or positive outlooks demonstrates the region's soundmacroeconomic environment, improving global commodity prices, high industrialproduction and investments, and companies' relatively robust financial position.

- We expect the positive ratings momentum in the Nordic region to moderate over themedium term, since we may be approaching an inflection point where risks become amore salient factor in our rating consideration.

- In our view, the key risks for Nordic corporates stem from the inevitable downshiftingfrom peaks in sectors such as capital goods, continued volatility in commodity prices,and possible negative contagion effects from unexpected geopolitical events.

We currently rate 82 companies in the Nordic region's key sectors, including forest products andpaper, utilities, capital goods, oil and gas, telecommunications, and real estate. The core of ouruniverse of rated Nordic corporate entities chiefly comprises large well-established globalparticipants with lower financial leverage than international peers'. In addition, and unlike in theU.S., small and midsize Nordic companies rely heavily on bank funding, which remains abundantand attractive. We believe, however, that they will increasingly turn to the capital markets, sincethe tenors are typically longer, funding is generally on an unsecured basis, and it's a means ofdiversifying funding sources. We consider that capital-intensive sectors, such as real estate, willcontinue to lead the transition. In fact, many real estate companies have issued bonds over thepast few years.

Our ratings on 56 companies (about 68%) are investment grade. The median rating of 'BBB' isfirmly in that category, while that in both EMEA (Europe, the Middle East, and Africa) and NorthAmerica is skewed toward the 'BB' and B' categories (see chart 1), reflecting a greater share ofcompanies with high leverage (including from leveraged buyouts; LBOs) and, particularly in theU.S., a higher proportion of companies funded through the capital markets rather than thebanking system.

Industry Report Card:

Nordic Corporates Are Still Powering AheadAugust 16, 2018


Per Karlsson

Stockholm

(46) 8-440-5927

[email protected]

Mikaela Hillman

Stockholm

+ 46 84 40 5917

[email protected]

Sandra Wessman

Stockholm

(46) 8-440-5910

[email protected]

Gustav B Rydevik

London

+ 44 20 7176 1282

[email protected]

Thierry Guermann

Stockholm

(46) 8-440-5905

[email protected]

SECONDARY CONTACT

Andreas Kindahl

Stockholm

(46) 8-440-5907

[email protected]



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Chart 1

In line with the rating distribution, we see, on average, slightly more favorable business riskprofiles for Nordic corporates than for those in the rest of EMEA. We assess about 74% of them assatisfactory ('3' on a 1-6 scale, where '1' is excellent) or better (see chart 2). This is largely becauseof the high number of blue-chip companies, which benefit from highly diversified operations,leading market positions, and, for utility companies, a good share of low-risk regulated business.In addition, rated Nordic nonfinancial corporates' financial risk profiles are generally strongerthan the average for companies we rate in EMEA (see chart 3), underscoring their above-averagecredit quality. We assess more than half of them as intermediate (score of '3') or better (on a scaleof 1-6, with the strongest being '1' minimal). This compares with only 36% for all EMEAcorporates; and only 16% of Nordic corporates are highly leveraged ('6') compared with 28% forEMEA.




Industry Report Card: Nordic Corporates Are Still Powering Ahead

Chart 2 Chart 3

More than 90% of our Nordic corporate ratings carry stable or positive outlooks, and only 9% havenegative outlooks or are on CreditWatch negative. While this is broadly the same picture as forEMEA, there has been a positive trend over the past few quarters (see charts 4 and 5).

Chart 4





Chart 5

KEY INDUSTRY TRENDS

Telecom Markets: Consolidations Will Likely Slow Down After 2018

Consolidation, well-invested networks, booming consumption of high-speed mobile and fixeddata, and sound macroeconomic conditions are key strengths of Nordic telecom markets.However, although we expect telecom operators will continue to upgrade their mobile andfixed-line networks, we believe monetization of those investments will pose a major challenge inthe very competitive environment.

Substantial and fully debt-funded acquisitions could weigh on our ratings because the negativeshort-term financial impact more than offsets the benefits, including larger scale, a better valueproposition, cost synergies, and potential revenue synergies from cross-selling. For example, weplaced our rating on Sweden-based Telia on CreditWatch negative after the company announcedits plans to acquire GET in July 2018, because of the additional debt burden. We expect theacquisition will lead to an increase of Telia's adjusted debt-to-EBITDA ratio to the higher end ofthe 2.0x-3.0x range from the lower end previously. Other planned deals include Tele 2's mergerwith Com Hem, announced in January 2018, and Telia's bid to acquire Bonnier Broadcasting,announced in July.





Apart from ongoing deals in Sweden and Norway, we see little room for larger consolidation in therest of the Nordics. There have been several attempts to consolidate the Danish telecom marketover the past few years and Telia's CFO stated along with the half-year 2018 report that thecompany is now seeking opportunities for partnerships, since larger acquisitions have provendifficult. For example, Telia was unable to merge with Telenor's Danish operations in 2015because the European Commission didn't approve the deal. Furthermore, TDC cancelled its planto acquire Swedish media company Modern Times Group in February 2018 after TDC became thesubject of an LBO. We see little room for further consolidation in Finland, since it is already aconcentrated market with three large players. Consequently, we don't anticipate additionalmergers and acquisitions (M&A) to affect our Nordic telecom ratings.

Fixed-line and mobile networks are well invested across the Nordics as a result of growing dataconsumption and a strong macroeconomic environment. For example, LTE coverage as of June 30,2016, exceeded 95% in the Nordics, compared with about 85% on average in the EU. In addition,fiber networks now provide about 62% of all fixed broadband connections in Sweden (see chart 6),compared with 23% on average in the OECD, as well as one of the highest numbers of fixedbroadband subscriptions with speeds above 100 megabits per second (see chart 7).

Chart 6





Chart 7

In the Nordic region, as in the rest of western Europe, stiff competition, structural fixed-voicecord-cutting, OTT's (over the top content) disruption of pay-TV, and the ongoing commoditizationof mobile services in mature markets make organic growth difficult. For the Nordic telecomcompanies we rate, we foresee various prospects for revenues in 2018-2019, ranging from a 2%decline to about 3% growth, with the strongest potential in Finland and the weakest in Denmark.At the same time, we expect major investments in 5G rollouts to meet growing demand for moredata and higher network speeds. Trials are underway across the region and we expect spectrumauctions in Denmark will take place by year-end 2018, in Sweden and Finland during 2019, and inNorway during 2020. However, we currently do not envisage that these investments will have animpact on our ratings.

Nordic telecom equipment vendors could soon be at a turning point

The revenues of the region's two global players, Ericsson and Nokia, have been dropping since2016. Both companies have undergone significant restructuring, resulting in modest cash flowgeneration. However, we think revenues may stabilize in 2019, which could bolster their cash flowonce the restructuring is completed. We expect this will stem from better industry prospects and amore favorable geographic mix regarding demand.

Ericsson and Nokia rank No. 2 and No. 3, respectively, in the global mobile equipment space,positions they've held since 2015 (see chart 8). The market shrank by a high single-digitpercentage in 2017 but the decline has slowed somewhat this year, and we think the market couldstabilize in 2019 before returning to growth in the following years. We believe the recovery willresult from investments in 4G and gradual deployments of 5G (according to market research groupDell'Oro, 5G base-station shipments will not overtake those for 4G until 2022). Nokia is morediversified than Ericsson and its top-three global position in the fixed broadband market androuters for service providers could also support growth.





Chart 8

European vendors' (Ericsson and Nokia's) share of the mobile equipment market will likely alsobenefit from increased demand from the U.S. This is because both are extremely strong in theU.S., where Chinese telecom equipment makers aren't allowed to operate, but are weaker inChina, with only a 10%-15% market share. Neither company has benefitted from the hefty LTEinvestments in China in recent years, but LTE investments there are now slowing. At the sametime, demand in North America is rising, due to telecom operators' capacity investments and early5G deployments. As a case in point, in July this year, Nokia announced a multi-year $3.5 billionagreement with T-Mobile U.S. to install a nationwide 5G network.

What's more, Ericsson has recently accelerated the cost-cutting measures it began in 2016, andwe expect its future margins will benefit from the SEK10 billion cost reduction already achieved.Nokia, in addition to recurrent restructuring activities, has also been integrating Alcatel-Lucent,which we think will result in better profitability from 2019 as well as gradually stronger cash flows.But we do not expect either company will move into investment-grade territory until the adjustedEBITDA margin (including restructuring costs) surpasses 10%, free operating cash flowscomfortably exceed dividends, and the capital structure stays robust (see table 1).

Table 1

Our Base Case For Nordic Telecom Equipment Vendors

--Nokia-- --Ericsson--

2017 2018e 2019e 2017 2018e 2019e

Revenue growth (%) (2) (6)-(7) 0-2 (9.6) (4)-(6) (1)-(3)

S&P Global Ratings adj. EBITDA margin (%) 9.6 7-9 13-15 Negative 5-8 8-10

FOCF (unadjusted) (mil. €) 1,211 (150)-150 700-1,000 445 0-20 100-250

DCF (unadjusted) (mil. €) 241 (1,200)-(900) (500)-(200) 99 (330)-(130) (230)-(80)





Table 1

Our Base Case For Nordic Telecom Equipment Vendors (cont.)

--Nokia-- --Ericsson--

2017 2018e 2019e 2017 2018e 2019e

Net cash (bil. €) 4.5 3.1-3.4 2.4-3.0 3.0 3.0-3.4 3.1-3.5

S&P Global Ratings adj. leverage (x) 0 0.5-0.7 0.4-0.6 Negative 0.5-0.7 0.4-0.7

FOCF--Free operating cash flow. DCF--Discretionary cash flow. e--Estimate. Source: S&P Global Ratings.

Table 2

Company/Rating/Comment Analyst

Ericsson (Telefonaktiebolaget L.M.) (BB+/Stable/A-3) ThierryGuermann

We believe that telecom equipment supplier Ericsson will reduce its revenues by 4%-6% in 2018 and by 1%-4% in 2019, after negative growth of 9.8%in 2017. We see this as primarily driven by the continued drop in radio access network investments and lower service revenues from exiting someunprofitable contracts, but see potential for future growth in future 5G roll-outs, supported by continuously rising data consumption. We expectprofitability to rise as the company's Swedish krona (SEK) 10 billion cost-reduction plan is nearly completed, leading to an EBITDA margin of 5%-8%in 2018 after the negative 3.9% margin in 2017. We anticipate debt to EBITDA to stay in in the 0.4x-0.7x interval over the next two years.

Nokia Corp. (BB+/Stable/A-3) Lukas Paul

A decline of total reported revenue of 6%-7% in 2018 (including exchange rate effects), after a 2.1% decline in 2017 and return to revenue growth of0.5%-1.5% in 2019. Planned capital expenditures (capex) of telecom operators are the primary driver of demand in Nokia's core market for telecomequipment. In our view, operators' spending plans are strongly influenced by major technology upgrade cycles. Since 4G network coverage has alreadyreached above 60% of the global population, we expect the global radio access network equipment market will decline by low single digits in 2018 andremain flat in 2019, before potentially increasing in the following years supported by 5G roll-outs. We continue to expect negative discretionary cashflow (DCF) in 2018 and 2019 due to high shareholder returns. We expect Nokia will maintain a very conservative balance sheet, with reported net cashof at least €2.0 billion.

Telia Company AB (A-/Watch Neg/A-2) XavierBuffon

In July 2018, Telia announced its plans for a fully debt-financed acquisition of Norwegian cable operator GET for NOK21 billion. The CreditWatchplacement reflects that we expect to downgrade Telia by one notch, however we do not exclude the possibility of a two-notch downgrade, which couldoccur if we foresee Telia's adjusted debt to EBITDA ratio increasing to more than 3x on a sustained basis. However, we think this is less likely based onour view of Telia's financial policy targets.

Telenor ASA (A/Stable/A-1) XavierBuffon

We believe Norwegian telecommunication company Telenor will have about flat group service revenues over 2018-2020, though accelerating toward2020 with very slight erosion in the Nordic region, reflecting mature markets and slight growth in Asia overall on the back of more dynamic GDP growthand an ongoing shift to higher value-added post-paid data contracts mitigating dropping voice revenues from prepaid products. We expect Telenor tocontinue to report sound operational performances over the next two years, with S&P Global Ratings-adjusted debt to EBITDA lower than 2x andfunds from operations (FFO) to debt comfortably above 40%.

Verisure Holding AB (B/Stable/--) SandraWessman

We expect Sweden-based Verisure to stay a clear leader in its key European markets. We expect double-digit revenue growth in 2018-2019, stemmingfrom high net subscriber growth and a continued low attrition rate of below 7%. We expect improvement in the adjusted EBITDA margin to about 43%in 2018, after 41% 2017, primarily due to operational efficiency gains from increasing scale in the portfolio business. We expect adjusted debt toEBITDA to remain high at about 6.5x at year end 2018.

Com Hem Sweden AB (publ) (BB/Watch Pos/--) SandraWessman

The CreditWatch stems from the announcement on Jan. 10, 2018, that Tele2 (not rated) and Com Hem have agreed to merge. The combined entity willhave annual pro forma revenues of SEK31.8 billion, compared with about SEK7.1 billion for Com Hem alone. It will become a strong No. 2 player inSweden, also offering mobile and fixed-line telecom services, and with improved geographic diversification, which in part will be offset by lowerprofitability. We plan to resolve the CreditWatch after the transaction closes, which we expect will take place in the second half of 2018. We anticipateat least a two-notch upgrade once we complete our analysis, after assessing the enlarged entity's future business prospects, strategy, capital





structure, financial policy, and free operating cash flow (FOCF) generation.

Evergood Lux 3 S.a.r.l. (B/Stable/--) SandraWessman

Evergood Lux 3 S.ar.l. is the new parent of leading Nordic payment service provider Nets A/S, as well as the financing subsidiaries Evergood 4 Aps andNassa TopCo. Nets plans to acquire German Concardis Payment Group and Polish Dotpay. In our view, the acquisitions will strengthen Nets'competitive position, but we also expect high adjusted gross debt to EBITDA of above 8.0x in 2018-2019 and modest FOCF.

Itiviti Group AB (B/Stable/--) SandraWessman

We anticipate that Swedish trading software provider Itiviti Group will increase its revenues by 3%-5% in 2018-2019. We believe the company willshow a gradual improvement in the reported EBITDA margin from 44% to about 47% between 2018 and 2019, driven by cost synergies and scaleeffects from the acquisition of Ullink. We anticipate an FOCF-to-debt ratio of about 4% in 2018 and 5% in 2019.

DNA PLC (BBB/Stable/--) SandraWessman

DNA is the leader on the Finnish cable TV market and a close No. 3 in fixed and mobile broadband markets. We expect the company's revenue toincrease by about 3% organically in 2018-2019, mainly stemming from stronger demand for mobile data and fixed broadband and balanced by acontraction in the terrestrial network and fixed line telephony. We expect profitability to keep improving gradually to an adjusted EBITDA margin ofabout 37%-38% in 2018-2019, mainly due to a greater share of high-margin service revenues and increasing scale. We anticipate adjusted FFO todebt of about 50%-55% in 2018 and 2019.

DKT Holdings ApS (B+/Stable/--) Lukas Paul

On July 17, 2018, TDC A/S announced its intention to sell its Norwegian business to Telia Company AB for Norwegian krone (NOK) 21 billion in cash(about €2.2 billion). Although TDC has yet to specify how it will use the proceeds, we expect the company will allot a sufficient amount toward debtprepayment or network investments, offsetting the smaller footprint and scale resulting from TDC's retreat from Norway. The stable outlook reflectsour expectation that a stabilization of EBITDA, alongside debt prepayments from the disposal proceeds, will result in pro forma adjusted debt toEBITDA of 7.0x-7.3x and FOCF to debt of 2%-4% in the next 12 months.

Navico Group AS (B/Stable/--) SandraWessman

We expect Norway-based provider of marine electronics Navico to exhibit strong organic growth in the recreational and commercial marine segments,and generally increased growth as income from acquired companies in 2017 and 2018 are consolidated with Navico. We anticipate no furtheracquisitions for 2018 and 2019. We expect gradual profitability improvements with the EBITDA margin increasing to about 17% in 2018-2019, and adebt to EBITDA ratio of 4.3x-4.5x in 2018 and 4.0x-4.4x in 2019.

Elisa Oyj (BBB+/Stable/A-2) Lukas Paul

We expect leading mobile and fixed broadband operator in Finland, Elisa, will show pro forma revenue growth of about 0.5%-2.5% in 2018 and 2019,driven particularly by mobile service revenues and new digital services, balanced by flat fixed-broadband revenues and a continued decline in landlinevoice and B2B fixed connectivity revenues. We expect flat-to-slightly increasing adjusted EBITDA margins of about 35%-37% in 2018–2019, enhancedby high-margin mobile service revenue growth, increasing scale of new digital services, and synergies from acquisitions, partly offset by somerestructuring and integration costs. Furthermore, we anticipate that Elisa will adhere to its conservative financial policy targeting net debt to EBITDAof 1.5x–2.0x, translating into S&P Global Ratings-adjusted debt to EBITDA of less than 2.0x.

Capital Goods And Auto Companies: The Good Times Won't Last Forever

Recent quarterly reports in the capital good sector frequently cite "record levels." Strong orderbooks, high revenues, and improving operating profit have led to ample headroom in our Nordiccapital goods ratings, due to strengthening balance sheets. Moreover, we have taken positiverating actions this year. For example, we have upgraded Atlas Copco to 'A+', revised our outlookson Sandvik and Volvo to positive, and moved our outlook on Alfa Laval to stable from negative.

Atlas Copco, Sandvik, and Alfa Laval have had good support from healthy global economic growthin recent quarters and high capacity utilization. Combined with increased investment in key endmarkets (commodity, construction, auto, and shipping), this has fueled sales and profitability. Ithas also led to an uptick in order books, with the combined book-to-bill ratios for the largestcapital goods companies now firmly above 1.05x (see chart 9), which hasn't been the case since2012. This points to continued solid revenue growth in the coming quarters. Furthermore, the





eurozone Purchasing Managers Index (PMI) reached 54.3 in July 2018 and the U.S. PMI 55.3 (areading above 50 indicates an expansion of the manufacturing sector, according to IHS Markit).

Chart 9

However, we believe all good things must come to an end and that the turning point for theindustry is approaching, with possible weakening of market conditions over the medium term,albeit it is difficult to pinpoint a specific trigger. Nevertheless, many industrial companies appearto have learned some painful but valuable lessons from previous downcycles and are betterprepared for them. Almost all capital goods companies we rate would likely enter that phase withstrong balance sheets and more profitable operations, after years of deleveraging andcost-cutting. Companies such as Volvo and Sandvik have, to an extent, reduced their operatingrisks, and Sandvik for example is focusing on less cycle-sensitive recurring after-market sales.Therefore we expect them to be less affected by a downturn than before. Nordic capital goodscompanies are typically also highly diversified, with production and sales spread across the globe;typically more than 90% of sales are outside the Nordic region.

We expect Nordic capital goods companies will continue to deliver solid results, at least for the fullyear 2018. Over the past few years, they have prioritized profitability ahead of top-line growth,which should support cash flows. Their focus on products or areas where they have or aspire tohave a leading position has led to several demergers and spin-offs in recent years (Sandvik,Autoliv, and Atlas Copco). Such transactions have somewhat reduced business diversity, but havealso typically led to greater profitability, even though untested in a downcycle. Still, in the Nordicmarket profit margins are much stronger than the European peer average (see chart 10), with





Atlas Copco standing out as the most profitable investment-grade capital goods company inEurope. We forecast Atlas Copco's EBITDA margin will be in the 25%-26% range in 2018, which isbetter than that of Nordic peers and far superior to the average for capital goods companies werate in Europe.

Chart 10

Since the last downturn, Nordic capital goods companies have reduced their debt substantially(see chart 11), and, as a result, have ample headroom in our ratings. This is largely thanks tostrong cash flow generation, which we expect will continue in the sector over the next couple ofyears. We see M&A risk as relatively low because we anticipate mainly small to midsize bolt-onacquisitions, in line with companies' strategies to focus on profitability rather than on revenuegrowth. Moreover, we foresee only gradual increases in ordinary dividend payments and onlymodest, if any, extraordinary dividends on a case by case basis, which will support healthybalance sheets. For some companies, such as Danfoss and Metso, there is flexibility for largeracquisitions in the ratings. Nevertheless, both companies have strong credit ratios for the ratings.We forecast Metso's funds from operations to debt will approach 60% in 2018, and Danfoss' at40%-45%, compared with our downside triggers of 45% and 30% respectively.





Chart 11

The three rated auto and truck companies, Volvo, Scania, and Volvo Cars, are also performing verywell, on the back of high order intake over the past year (see charts 12 and 13). We think Volvo andScania are well positioned to take advantage of the heavy truck market's transition toward moreenergy-efficient engines, including electrical engines that reduce emissions. Continued renewaland expansion of fleets in Europe, improving freight rates in North America, and a strong reboundin the demand for heavy-duty trucks in emerging markets will, we believe, all combine to driverevenue growth of 5%-10% in 2018 and early 2019. The sector remains very volatile, however,since truck sales typically correlate closely with economic growth over the cycle, and may havebenefited disproportionately from high fleet replacement needs and low financing costs in recentyears. As a result, we anticipate market conditions will soften from 2019. Fresh sanctions on Iranwill also likely curb order book growth, notably for Scania.





Chart 12 Chart 13

Table 3


AB Volvo (BBB+/Positive/A-2) MikaelaHillman

We changed our outlook on Volvo to positive on Volvo on June 27, 2018, because we believe management will be successful in its strategy tooperate without financial debt in the industrial segment over the cycle. We therefore believe Volvo can maintain a strong balance sheet, since thegroup also has an up-to-date product line, after investing heavily in fuel-efficient engine and emissions technology over the past few years. Wealso view Volvo as well positioned to take advantage of the transitioning heavy truck industry, which we believe will continue to drive growth andstrengthen the company's position in the market. Continued renewal and expansion of fleets in Europe, improving freight rates in North America, astrong rebound in the demand for heavy-duty trucks in Brazil, China, and Japan and good economic activity in India will continue to fuel increasesin the order book. We forecast a 5%-10% rise in Volvo's revenues in 2018 on the basis of strong order intake overall, mostly driven by highreplacement needs. We assume truck deliveries of 220,000-230,000 units in 2018, and remaining around this level in 2019. Volvo will be able tosustain EBITDA margins in the range of 11%-12% on the back of volume growth as well as operational efficiencies, in our view. We expect FFO todebt will remain well above 100% and debt to EBITDA below 1x in 2018-2020. Our positive outlook also reflects our view that Volvo is in a goodposition to sustain its robust credit ratios over 2018 and 2019.

Atlas Copco AB (A+/Stable/A-1) MikaelaHillman

The overall demand for Atlas Copco’s products and services remains strong, which resulted in a 10% increase in order volumes in the first sixmonths of 2018. We therefore expect continued strong revenue growth of 8%-12% in 2018 and 5%-8% in 2019, based on the group's healthybacklog in all divisions. We believe Atlas Copco will continue to benefit from the near term cyclical tailwinds and structural demand drivers, whichinclude increasing automation and electrification trends. That said, equipment demand from the semiconductor industry is expected to besomewhat lower in the near term. We estimate that Atlas Copco's EBITDA margin will be very high, at about 25%-26% in 2018 and 2019, comparedwith about 25% in 2017, supported by the Epiroc carve-out, but also volume growth leading to scale effects. We expect that management willcontinue to balance shareholder distributions based on its acquisition activity, allowing the company to sustain a healthy balance sheet, thereby,resulting in FFO to debt comfortably remaining above 60% over our rating horizon.

Sandvik AB (BBB+/Positive/A-2) MikaelaHillman

Over the past few years, Sandvik's operating performance and balance sheet have improved, and we therefore revised our outlook to positive inApril 2018. Organic order intake improved by 9% in the first half of 2018 resulting in a book-to-bill ratio of 106%. Replacement as well as expansiondemand for minning equipment, coupled with positive development in the large segments of automotive and general engineering continue to drivethe order book. We expect revenues to increase from flat to low-single digits in 2018 and 2019 eroded by recent disposals, but mitigated by solidgrowth in the remaining business areas on the back of a strong order book and our expectations of continued strengthening of end markets. Webelieve EBITDA margins will remain in the 20%-22% range following increased operational efficiency across all divisions, due to portfoliooptimization and cost base reduction. Sandvik has received cash proceeds of SEK9.5 billion from recent disposals and used about 50% to acquireMetrologic group and Inrock. That said, we perceive Sandvik will remain focused on keeping a strong balance sheet, and will use rest of theproceeds for debt repayment. Our positive outlook reflects that Sandvik can sustain FFO to debt of 85%-110% over the next two years.

Alfa Laval AB (BBB+/Stable/--) MartaBevilacqua





Alfal Laval's order intake in the first half of 2018 improved by 20% on the back of improvement in the oil and shipping end markets, especially fortanker segments and pumping systems. Moreover, new environmental regulations have resulted in an uptick in the demand for environmentalproducts. In view of the strong order book, we expect revenue growth of 5%-10% in 2018 and 2%-5% in 2019. We expect an EBITDA margin of19%-20% in 2018, with some further improvement in 2019, due to increasing volumes and cost-efficiency measures. Despite the exposure to somevolatile sectors, Alfa Laval has a long track record of delivering stable profitability in that range. Although we expect the company to expandthrough small bolt-on acquisitions, we believe it will use part of its free cash flow for debt reduction, thereby resulting in an improvement in FFO todebt to 40%-44% in 2018 and about 50% in 2019.

Dometic Holding AB (BB/Stable/--) MikaelaHillman

Dometic's revenues increased by 31% in the first half of 2018, following robust growth in recreational vehicles and positive development incommercial and passenger vehicles and aftermarkets; further strenghthened by acquisitions of SeaStar Solutions, Oceanair, and IPV completed in2017. We expect a trend of increased outdoor activities and an ageing population will continue to have a positive volume impact in Dometic'send-markets. We forecast that the group's sales will continue to increase by about 5%-10% per year. We expect EBITDA margins to improve to19%-21% in 2018-2019, from about 17.3% in 2017 as the company realizes synergies from the recent acquisitions. We forecast the group willcontinue to generate solid FOCF of SEK1.8 billion-SEK2.2 billion annually, and achieve a gradual improvement of credit ratios, including FFO todebt reaching 25%-27% in 2018 and 28%-30% in 2019, which is in line with our expectations for a significant financial risk profile.

Assa Abloy AB (A-/Stable/A-2) MikaelaHillman

We expect growth in the electromechanical products and smart door locks in EMEA and the U.S., driven by growth in residential markets, gooddemand conditions in Asia-Pacific, and strength in the global technologies and entrances businesses, to keep fueling Assa Abloy's revenue growth.We expect revenue growth of 8% supported by strong order backlog and accretive acquisitions, in line with the copmanies strategy. We expect theunderlying margins to remain stable at 19%-19.5%, thanks to volume growth and efficiency efforts. That said, Assa Abloy recently announced aSEK6 billion write down related to impairment of goodwill and other intangible assets and some operating assets in China. However, we beleivethese write-offs will be absorbed within the existing rating, given its financial flexibility. Assa Abloy has an acquisitive growth strategy, but is alsocommited to the current rating level. Since the company continues to utilize free cash flow for small bolt-on acquisitions, we expect its FFO to debtwill remain at 30%-35% over our rating horizon.

Scania AB (publ.) (BBB/Stable/A-2) MikaelaHillman

Demand for trucks remains strong in most markets, driven by the automotive, mining, forestry and agricultural sectors, among others; howeverScania's order bookings in the first half of 2018 was negatively affected by the reintroduction of sanctions in Iran, which likely will also have animpact in the near term. We therefore now forecast revenue growth of 5%-6% in 2018 based on the truck deliveries in the first half of 2018 andstronger services revenue. However, we believe volume growth is at the top of the cycle due to the decline in the order book to about 4% in the firsthalf of 2018 compared with the first half of 2017 and therefore we expect revenue growth to remain flat in 2019. We assume truck deliveries of79,000-80,000 units in 2018, and remaining around this level in 2019. We expect a gradual improvement of the EBITDA margin to around 12.5%,thanks to strong cyclical demand, new product offerings, and moderately lower research and development investments. We expect FFO to debt willremain well above 100% and debt to EBITDA below 1x in 2018-2020.

Danfoss A/S (BBB/Stable/A-2) MartaBevilacqua

Danfoss' end markets have been experiencing positive momentum, particularly in the power solutions business across all regions, driven by highactivity levels in construction and road building. We expect 2018 revenue growth to stabilize at 4%-5%, reaching more than Danish krone (DKK) 45billion and 3%-4% in 2019, excluding the impact of large acquisitions. We expect EBITDA margins to remain stable at around 16% because weconsider that a great portion of the benefits of productivity improvements will go toward digitalization costs and be partly absorbed by integrationcosts from acquisition. We estimate Danfoss' capex will exceed DKK2.2 billion (4.5% of revenues) as the company continues to invest in in growthinitiatives and digitalization. We believe FFO to debt, after accounting for small bolt-on acquisitions of around DKK2 billion per year, over the nextfew years, will lie between 40% and 45% in line with our expectations for an intermediate financial risk profile.

Volvo Car AB (BB+/Stable/--) Per Karlsson

Volvo continues the good progress in strengthening its competitive position through successful model launches, which are replacing its modellineup and enabling the company to reposition itself as a premium car manufacturer. In the first half of 2018, Volvo Car sold 317,639 units, withSUV sales accounting for more than 50% of the volumes sold. We expect deliveries to exceed 600,000 units in 2018, a 5% increase from 2017, onthe back of higher premium cars sales, like the XC models and S90. This would translate into revenue growth of 5%-10% in 2018. We expectEBITDA margins to remain in the range of 9%-10%, due to the positive volume and sales mix. The finalization of the U.S. plant will lower capex in2018 compared with that in 2017. Although we expect adjusted debt to remain zero or low, which is strong for the rating, we factor in the risk ofpotential high volatility in cash flow and leverage metrics, since we view Volvo as being more exposed than peers to the risk that its investments innew models and expansion of production could experience operational delays or challenges.

Husqvarna AB (publ) (BBB/Stable/A-2) MikaelaHillman

Husqvarna recently announced its intention to restructure its consumer brand division. However, our view of the group's creditworthiness already





takes into consideration the weak operating performance at the consumer brand division, which primarily targets the mass-consumer market inNorth America. We therefore continue to expect that Husqvarna's credit ratios, such as FFO to debt and debt to EBITDA will be 38%-45% and1.8x-2.3x, respectively, over 2018, well in line with the rating.

Metso Corp. (BBB/Stable/A-2) MartaBevilacqua

Strength in the construction markets continues to drive growth in the aggregates business, and recovery in the commodities market has resultedin an uptick in mining capex, mainly for replacements, and smaller capex. This has resulted in a strong order backlog of about €1.6 billion in thefirst six months of 2018, which equates to more than 1.0x of 1H 2018 net sales, providing the group with decent short-term visibility on futureactivity levels. We expect overall sales growth of 2%-4% in 2018, based on our expectations of continued strengthening demand in aggregates, anda recovery in the mining business supported by the accretive acquisitions of P.J. Jonsson and Rotex. We believe adjusted EBITDA margins willrecover to slightly above 13.0%, thanks to the group's efforts to restore its contract margins, as well as to the leaner internal organization since thebeginning of 2018. This compares with 11.7% at the end of 2017 and 12.3% at year-end 2016. This would result in FFO to debt nearing 60% in2018, and about 55% in 2019, which is in line with our expectations for a modest financial risk profile.

Autoliv Inc. (A-/Stable/A-2) Per Karlsson

In June, Autoliv spun off one division, Veoneer, but despite this we forecast that revenues, excluding Veoneer, will increase by 8%-12% in 2019,compared with 3% in 2017 and 9.9% in 2016. We anticipate that the accelerated growth will be the combined effect of increased order intake,light-vehicle production, and contents per car. We expect EBITDA margins for the remaining passive safety operations to improve to 15%-16%,from 12.8% in 2017, for the combined group. We forecast that Autoliv's FFO to debt will fall just below 50% after the spin-off, compared with 114%at year-end 2017. Since we also forecast strong FOCF of $250 million-$400 million in 2018 increasing to around $700 million-$800 million in 2019,we expect FFO to debt to recover to above 60% and debt to EBITDA to below 1.5x within the next 12-18 months, which is in line with ourexpectations for a minimal financial risk profile.

Norican Global A/S (B/Stable/--) MikaelaHillman

We expect Norican's sales growth to gradual recover over 2018 and 2019 after a year of somewhat lower than expected sales in Light Metal CastingSolutions Group (LMCS), which Norican acquired in the end of April 2017. The demand for cast parts in the automotive sector is an important driverof the group's sales growth. We expect an increase of 2%-3% in light-vehicle production in 2018 and 2019, which is consistent with ourexpectations for global GDP growth. We forecast that Norican's sales will improve by about 10%-12% in 2018, driven by the expanding backlog andfull year contribution of LMCS, and by 3%-5% in 2019. We continue to expect that the higher-growth aluminium foundry segment and a risingshare of aftermarket sales will keep fueling growth. The group also benefits from its relatively large installed base of machines and its global salesand service platform, which contribute to recurring aftermarket revenues. We forecast an EBITDA margin of 11.5%-12.5% in 2018, down from12.8% in 2017, following some restructuring charges, and improving to about 13.5%-14.5% in 2019 on higher volumes, reduced restructuring andintegration costs, and the realization of synergies. We forecast an adjusted debt to EBITDA ratio of 6.0x-6.4x in 2018, gradually improving to4.9x-5.3x in 2019, and that FFO cash interest coverage will stay above 2.5x, which is in line with the rating.

Kongsberg Automotive ASA (B+/Stable/--) Eve Seiltgens

We recently assigned our rating to Kongsberg. We forecast an increase of about 2% in global automotive production following moderate growth inEuropean markets, stable to positive trends in China, and despite some softness in the U.S. This is consistent with our GDP growth assumptions.We expect Kongsberg Automotive's revenue growth at about 5% in 2018 and in 2019 because of expansion in China and increased business wins inits specialty products segment. We expect a gradual increase in EBITDA margins toward 8%-9% in 2018 and 9%-10% in 2019 (7.1% in 2017)primarily due to revenue growth, lower restructuring costs, and continued rationalization of the industrial footprint. In addition, we expect thecompany to face headwinds including a shortage of components and higher scrap rates in certain product lines. We expect that KongsbergAutomotive's adjusted FFO-to-debt ratio will remain at 12%-20% in 2018-2019, and that its FOCF will turn positive in 2019.

Utilities And Infrastructure: A Stable Regulatory Environment AndRising Electricity Prices, But Risk From M&A

Most of our outlooks on Nordic utilities and power companies are stable (13 of the 15 entities werate). This reflects the stable and favorable regulatory frameworks for power and gas networks inthe region and recovering power prices. We expect credit metrics to remain generally stable overthe next two years, despite sustained investment needs. Our outlook on Fortum is negativefollowing its M&A, and that on Kraftringen is positive, due to the company's improving metrics.

A material recovery of Nordpool power prices since their historic lows in early 2016 (see chart 14)has boosted the cash flow prospects of companies in the power generation business. Nordicsystem spot prices averaged €39 per megawatt hour (/MWh) during the second quarter of 2018, a





42% increase compared with €27.4/MWh in the second quarter of 2017 and up 63% from€23.9/MWh in the corresponding period of 2016. These strong price improvements are mainly theresult of higher fuel and CO2 prices, as well as a lower hydrological balance due to the drysummer.

Chart 14

The cash flow effect of rising system power prices is relatively greater than in most otherEuropean markets, since Nordic generation companies are more exposed to outright powerproduction, hydro, and nuclear notably. Consequently, we expect their EBITDA will increase overthe coming two years (see chart 15). Nevertheless, we also expect free cash flow after dividends tobe negative and debt to increase (see chart 16) as investments stay high, largely to support theenergy transition, with network upgrade requirements, growth in renewable energy operations,and rising investor returns over 2018-2020. Overall, we forecast Nordic utilities' capitalexpenditure (capex) will reach a cumulative €25.7 billion over that period (see chart 15).





Chart 15





Chart 16

We view the regulatory frameworks in Finland, Norway, Denmark, and Sweden as stable,predictable, and independent. They have been in place for many years and have allowedcompanies fair returns on their investments. This is particularly important, since weatherproofingof networks is high on the agenda in all of the Nordic countries and requires continued highinvestments.

Currently the main focus is the evolution of the weighted average cost of capital (WACC) forelectricity distribution system operators (DSOs) in Sweden, which is under debate as the countryprepares for upcoming general elections. We expect DSOs to receive a lower but manageableWACC for the next regulatory period (from 2020), in line with a more short-term view on thecost-of-debt component. At the same time, we expect Swedish regulated utilities to manage theircost structures, investments, and, ultimately, balance sheets accordingly. We also expect about a0.4% decline in the WACC for the Norwegian transmission system operator, Statnett, fromJanuary 2019. However, we do not expect any rating impact from these potential changes.

We also believe that Nordic power markets are ready for the transition toward low-CO2 powergeneration. The Nordic countries already have a high share of renewable power production (seechart 17), primarily through hydropower resources in Norway and Sweden, and through a longhistory of subsidized wind power in Denmark. We note, however, that there has been a significantincrease in zero-subsidies auctions recently, in line with the general market and morecost-effective wind power generation assets, generally.





Chart 17

As the world leader in offshore wind, Danish Ørsted is playing a major role in the deployment of thetechnology worldwide. Swedish power company Vattenfall also has a growing pipeline of windprojects, which is becoming an increasingly important contributor to its EBITDA. Nuclear energypolicies are also expected to remain stable, with a long history of support for nuclear power inFinland, broad political agreement in Sweden leading to reduced nuclear production taxes, and nofinal date for nuclear power generation. In practice, however, the decision not to subsidize nuclearpower production has resulted in early closure of four of Sweden's 10 reactors, and it is unlikelythat any of the remaining plants will be replaced at the end of their useful economic life.

Attractive financing conditions and substantially high valuations of regulated or long-termcontracted assets may also accelerate changes in the operating scope for utilities, a theme that iscommon across Europe. With strong appetite from infrastructure funds, and EBITDA multipleswell above 20x for the valuation of high-quality assets, companies may be tempted to divest someof their mature, low-yielding assets.

At the same time, the cheap cost of funding and rising expectations of higher rates in the comingquarters may also trigger early investment decisions; therefore, M&A-related debt could be themain reason for future rating actions. For example, Fortum announced the purchase of about 47%of Uniper's shares for about €3.8 billion at the beginning of this year, resulting in a one-notchdowngrade and a negative outlook. Although many companies focus on organic growth and awell-defined investment pipeline, we cannot rule out business consolidation, notably forliberalized activities (supply and merchant generation activities). In addition, more stringent





requirements to manage assets effectively may also encourage smaller players to team up andshare research and investment costs.

Table 4


Utilities

Caruna Networks Oy (BBB+/Stable/--) Gustav B.Rydevik

We expect the Finnish fully regulated electricity distribution system operator Caruna Neworks to increase tariffs in line with allowed revenueincreases for the current regulatory period and anticipate annual capex of €230 million-€250 million. We anticipate an FFO to debt ratio of9%-10%.

Elenia Finance Oyj (BBB/Stable*) Gustav B.Rydevik

Elenia's main business operation is electricity distribution, and it is the second-largest electricity distribution operator in Finland. It also runsdistrict heating operations, partly based on own generation. Elenia was formed in 2011 as Vattenfall divested its Finnish operations. Elenia'sfinancing structure is ring-fenced, and the financing group is delinked from its ultimate parent company. The debt issued by the financing groupincludes structural enhancements designed to reduce the likelihood of default.

Ellevio AB (BBB/Stable*) Gustav B.Rydevik

We anticipate increases in EBITDA and FFO over the next few years, relating to price increases, a growing asset base, and the now-consolidatedNynäshamn Energi. We expect, however, that FFO to debt will stay between 6.0% and 8.0% through 2019 because we anticipate Ellevio willcontinue investing heavily in its network and returning substantial cash to shareholders, primarily through payments on shareholder loans.

Energinet.dk SOV (AA-/Stable/A-1+) Gustav B.Rydevik

We expect that Energinet.dk SOV will retain its very important role to the Danish government as the country's monopoly transmission systemoperator and continue to fund itself primarily through government loans, limiting refinancing risk. We also expect Energinet's interest coverageratios to support our assessment of its aggressive financial risk profile over the coming 24 months, specifically FFO cash interest coverage ofabove 2.0x, due to its access to low-cost loans from the Danish government.

Fingrid Oyj (AA-/Stable/A-1+) Anna Brusinets

Fingrid is the monopoly owner and operator of Finland's electricity transmission network. We anticipate the company will remain strategicallyimportant to the Finnish government and see a high likelihood that the government would provide timely and sufficient extraordinary support toFingrid in the event of financial distress. We expect stable and predictable underlying earnings, supported by a favorable regulatory framework. Inthe future, we expect an FFO to debt ratio of 19%-21% and debt to EBITDA of about 4x.

Fortum Oyj (BBB/Negative/A-2) MassimoSchiavo

Following its acquisition of a stake of 47.12% in Uniper for around €3.8 billion, the possible remedies to strengthen the balance sheet remainunclear and the time to implement them might extend beyond our forecast horizon, resulting in credit metrics we regard as not commensurate forthe current rating. All things remaining equal, our forecasts indicate that Fortum's credit metrics will be below our medium- to longer-termexpectations for the 'BBB' rating, including adjusted FFO to debt well below 25% over 2018-2019.

Kraftringen Energi AB (publ) (BBB+/Positive/A-2) Gustav B.Rydevik

Sweden-based Kraftringen Energi has continued to generate solid cash flows and to deleverage following the completion of the combined heatand power plant in Ortofta; and we understand that the company has used the proceeds from its recent divestment of its non-core electricitynetwork in Nynäshamn to further repay debt.

Landsvirkjun (BBB/Stable/A-2) Gustav B.Rydevik

We expect that Iceland-based electricity generation and transmission company Landsvirkjun will gradually improve its credit metrics by using itspositive free cash flow to reduce debt. We anticipate the company will continue benefiting from low cost generation and relatively stable EBITDA,and expect a FFO to debt ratio of 14.5%-15.5% in 2018.

Orsted A/S (BBB+/Stable/A-2) MassimoSchiavo





We expect Danish offshore wind company Orsted's wind power segment to maintain a credit-supportive operating performance over the next twoyears, thanks to the stable and predictable nature of the segment's operations. We believe that the relationship with the Danish government willremain stable and we expect no significant changes to the company's current strategy or financial policies. Following the recent disposal of powernetworks in Denmark, we do not expect that there will be any significant changes to the company's current strategy or financial policy, whichsupport FFO to debt of about 30%. We anticipate that Orsted will have plenty of headroom for this target over the next two years, and we projectFFO to debt well above 45%. We believe such headroom in financial metrics is credit supportive, given the exposure to construction riskembedded in the growing wind offshore operations.

Statkraft AS (A-/Stable/A-2) Gustav B.Rydevik

Statkraft remains the third-largest power generation company in the Nordic region. We consider its highly competitive, low-cost, and flexiblehydropower production--with a cash cost of €9.83 per megawatt hour--to be a key strength. Statkraft's credit metrics improved across the boardin 2017. The company's adjusted EBITDA increased to NOK15.2 billion from NOK14.1 billion in 2016, mainly as a result of higher power prices andcontributions from market activities.

Statnett SF (A+/Stable/A-1) Gustav B.Rydevik

We anticipate that the stable and predictable regulatory framework will continue supporting Norwegian state-owned electricity transmissionsystem operator Statnett. We expect continued implementation of the current NOK50 billion investment plan through 2021. We expect an FFO todebt ratio of 7.5%-8.5% for 2018 and 8.0%-9.0% for 2019.

Stockholm Exergi Holding AB (publ) (BBB+/Stable/A-2) Gustav B.Rydevik

Stockholm Exergi is the largest district heating operator in its area, which does not follow a defined regulatory framework in Sweden but isimplicitly oversighted by the Swedish Competition Authority. We expect the current market-based framework for district heating in Stockholm tocontinue being predictable and expect Stockholm Exergi's business to stay stable. We expect a FFO to debt ratio of 20%-22% in 2018 and of21%-23% in 2019.

Tekniska Verken i Linkoping AB (A+/Stable/A-1) Gustav B.Rydevik

We assess the link between Swedish multi-utility Tekniska Verken i Linkoping (TvAB) and its owner, the City of Linköping, will stay very strong. Weexpect TvAB to benefit from strong cash flow generation from its fully regulated electricity distribution business and stable district heatingoperations. With the new combiner heat and power plant in operation, we believe profitability will increase via a more efficient fuel mix. We expectan FFO to debt ratio of 55%-60% in 2018-2019.

Teollisuuden Voima Oyj (BB+/Stable/B) StefaniaBelisario

We believe the terms of the settlement agreement signed by Finnish nuclear producer Teollisuuden Voima Oyj (TVO) and the Olkiluoto 3 supplierconsortium protect TVO from further cost overruns or Areva's risk of insolvency. We expect a debt to EBITDA ratio of 13x-15x and FFO interestcoverage of 2x-3x from 2020.

Vattenfall AB (BBB+/Stable/A-2) Pierre Georges

Vattenfall maintains its position as a leading electricity generation company in northern European countries, especially in Sweden where itgenerates about 50% of all electricity generated and has close to a 30% market share of electricity sales. We understand that the majority ofgrowth investments over the next five years will be dedicated to renewables, with a significant share going into wind production under differentsupportive subsidy schemes, in addition to investments in stable district heating and electricity distribution. We believe that Vattenfall'ssignificant investments in resilient electricity distribution, heating networks, and its growing wind farms will translate into solid earnings growthand enable the group to maintain its current financial risk profile. We expect an FFO to debt ratio above 20%.

Infrastructure

Avinor AS (AA-/Negative/A-1+) Juliana C. Gallo

Norwegian airport network operator Avinor owns and operates 45 of the 51 airports in Norway. We estimate annual passenger volume growth of1.5%-3.0% for 2018-2019. We expect EBITDA to bounce back from the low 2017 levels due to lower one-off expenses related to provisions forpensions, environmental liabilities, and payments to the Norwegian Armed Forces. We anticipate an EBITDA to debt ratio of 5.0x-6.0x and an FFOto debt ratio of 13%-14% for 2018-2019.

Norske tog AS (A+/Stable/A-1) VarvaraNikanorava

We expect that Norway-based government-owned rolling stock operating company Norske tog will continue to post robust earnings and cash. Inour view, Norske tog will continue to report stable profitability and cash flows in the near future as it pursues its expansionary capital expenditureprogram. This is underpinned by the Norske tog's strong competitive position as a provider of most of the passenger rolling stock in the country,although Norway's rail network is opening to competition. The company has shown stable operating performance in its first year of operations as





part of a reformed rail industry in the country.

VR-Yhtyma Oy (A+/Stable/--) KaroliinaHienonen,

VR Group has a solid competitive position as the incumbent provider of rail passenger and freight services to the Finnish economy. Ourassessment of VR's SACP remains somewhat constrained by the uncertainties around the future competitive landscape following the passengerrail service liberalization processes in both long distance and commuter passenger rail in the coming years. The rating on VR is supported by itsvery low nominal debt. We expect VR to be able to sustain strong FFO to debt at around 80%-90%. Our analysis includes ongoing--albeitdecelerating--growth in passenger numbers, robust freight volumes under the improving trade environment, a strong backlog of orders in theinfrastructure construction segment, and finalization of the investment program relating to the renewal of fleet.

Norges Statsbaner AS (A-/Negative/A-2) BeataSperling-Tyler

We view NSB's business risk profile as satisfactory. The introduction under the rail reform of the competitive tenders for provision of passengerrail services on the Southern and Northern lines from June 2019 and December 2019, respectively, will expose about 25% of NSB AS's revenue(12% of NSB Group's revenue) to competition. However, in addition to still operating passenger trains in at least six out of the eight geographicservice areas in Norway, we believe NSB will be well positioned to compete for the first two tenders, and could remain a monopoly until around2030. We believe that, after the reform, NSB will continue to benefit from a high likelihood of extraordinary government support in the event offinancial distress. We expect adjusted FFO to debt of 22%-24% in 2018-2019.

*Rating on senior secured debt.

Oil: Credit Metrics Will Strengthen In 2018-2020

We rate seven Nordic companies, predominantly based in Norway, with either direct or indirectexposure to oil and gas prices. The companies have faced headwinds over the past few years, ashydrocarbon prices plunged to levels not seen for over a decade. This affected profitability, cashflows, and investment levels before stabilizing recently. However, we anticipate an improvementin credit metrics in 2018-2020 on the back of sizable cost reductions, which we believe willstrongly support cash flow generation, especially with Brent prices currently above $70 per barrel(see chart 18). Yet we don't think this will automatically translate into upgrades in the region, sincedividend payments, M&A activity, exploration and capex, and increased volatility risk couldcontinue to constrain our ratings.





Chart 18

In the coming years, we anticipate production in Norway will stabilize and increase alongsidehigher production levels when the key field, Johan Sverdrup, comes on stream, most likely in 2019.We believe companies on the nordic continental shelf (NCS) should be active in the comingquarters, since it benefits from lower costs for exploration and development. This will also supportthe drilling companies, where we believe the market has bottomed out. Contracts recentlyawarded by Statoil and Aker BP to Odfjell Drilling (not rated) average more than $300,000 per day,and two harsh-environment rigs have recently sold for more than $500 million, figures not seenover the past three years.

Consequently, we may see a gradual increase in day rates, although reduced scrapping ratescould temper the improvement if more units remain available due to rising oil prices. Even thoughcosts may be at their lowest point in a decade, price inflation and continued high volatility ofhydrocarbon prices could neutralize the gains. These uncertainties are exacerbated by a numberof geopolitical issues. We also believe OPEC's production cuts rather than strong demand for oilhave been behind the positive oil price development. The increasing need for drilling rigs in toughenvironments can provide opportunities for harsh-weather units, where rig supply is lower andhigh specifications somewhat protect that market. We believe standard rigs, such as platformsupply vessels, will continue to suffer from oversupply in the near term, however.

Cost deflation and the rise in oil and gas prices bode well for the oil and gas industry in Norway.Nevertheless, reliance on a few producers is an ongoing trend that may be of concern (see chart19). We have noted that several larger oil companies have decided to invest in other regions, giventhat the NCS does not display high growth potential but is rather mature and requires constantinvestments to avoid high effective tax rates. For example, Statoil took over Total's 51% stake in





the Martin Linge field and a 40% interest in the Garantiana discovery on the NCS. Although the keyplayers are large international oil companies, Norway is not a core market to all of them, except forStatoil. As such, the risk of more players exiting the region is likely. That said, the eight largestcurrent producers accounted for 85% of production in 2017 and are among the global oil majors.

Chart 19

Table 5


Equinor ASA (AA-/Stable/A-1+) Edouard Okasmaa

We recently upgraded Equinor (former Statoil), following our view that supportive market conditions will enable Equinor to build meaningfulheadroom in its credit metrics, allowing it to sustain FFO to debt averaging 60% or higher. We expect Equinor to produce 2.0 million-2.1 millionbarrels of oil equivalents (BOE) in 2018 , implying 2%-3% annual growth in 2018 and 2019 and further production growth beyond 2019 andwhich together with gradually improving upstream profitability from cost savings and upstream projects with lower break-even prices weanticipate will lead to FFO to debt of around 70% for 2018, and above 60% for the following years.

Norsk Hydro ASA (BBB/Stable/A-2) Sergei Gorin

We anticipate Norwegian aluminum producer Norsk Hydro will maintain solid financial metrics in 2018, owing to low debt leverage, strongcash flow generation, and continued prudent financial policies. We believe that the effects on operating margins and the extent of synergies oflast year's acqusition of extruded aluminium products manufacturer SAPA remain to be seen during 2018. We expect slight growth inaluminum production to 2.3 million tons in 2019, and an FFO to debt ratio above 40% in 2018 and 2019.

SSAB AB (BB/Positive/B) Lena LiacopoulouStaad

We expect the net effect of the newly imposed U.S. steel import sanctions to be positive for Swedish steel maker SSAB, as we believe the





company's U.S. volumes will be excluded from the tariffs and the remainder will either get exempted or any increases will likely be absorbed bythe customers. We expect continued favorable industry margins in the U.S. and Europe, translating into significantly improved EBITDA marginsof 13.5%-14% in 2018-2019. We expect an FFO to debt ratio exceeding 60% for both years.

Stena AB (B+/Stable/--) Edouard Okasmaa

We expect Stena to remain affected in the near term by trough years for offshore drilling, which we believe will weigh on forecast cash flowgeneration over the next couple of years. The rating is however supported by continued strong liquidity, as well as stabilizing financialperformance and credit ratios, with support from the stable real estate operations, and healthy cash flow generation from the ferry, shipping,and property operations. We expect an FFO to debt ratio of 7%-8% in 2018.

Corral Petroleum Holdings AB (Publ) (B+/Positive/--) Edouard Okasmaa

We anticipate the refining margins of Sweden-based refiner Corral Petroleum will weaken in 2018-2019 from above mid-cycle levels, amidhigher oil prices, but believe the company will continue to generate positive free operating cash flow. We expect relatively solid economicgrowth and oil prices, leading to steady demand for refined products. We expect average adjusted debt to EBITDA of 3x-3.5x and positive freeoperating cash flow of SEK500 million-SEK1,000 million in 2018 and zero to slightly positive in 2019.

Yara International ASA (BBB/Stable/A-2) Paulina Grabowiec

Over the next two years, we expect relatively low-cycle industry conditions and supply exceeding demand in the global fertilizer industry. Weexpect Yara, the world's largest producer of nitrogen fertilizers and fertilizer distributor to maintained adjusted FFO to debt of 35%-45%.

Welltec A/S (B-/Stable/--) Lena LiacopoulouStaad

We expect a recovery in income of at least 20% for Denmark-based oil and gas well technology provider Welltec, after the decline in 2017 dueto lower oil prices. We believe this will stem from a stabilization of prices for the Well Intervention Services division and positive developmentsin the Well Completion Solutions Line of business. We anticipate an adjusted debt to EBITDA ratio around 6.0x in 2018.

Perstorp Holding AB (publ) (B-/Stable/--) Jonathan R.Littlefair

In November 2017, we revised our outlook on Swedish specialty chemicals producer Perstorp to stable from positive. We expect the companyto exhibit mid-single-digit growth in 2018, resulting in reported EBITDA of approximately SEK2.1 billion-SEK2.2 billion and an adjusted debt toEBITDA ratio of 7.0x.

Aker BP ASA (BB+/Positive/--) Edouard Okasmaa

We believe Norway-based oil company Aker BP will increase poduction in 2018 and in 2020, driven by the production addition of the JohanSverdrup field. We expect production costs to rise because a higher share will come from the more costly Valhall field and the low-costAlvheim field is depleted. We expect FFO to debt of 45%-50% in 2018 and 30%-35% in 2019.

Faerch Plast Midco ApS (B/Negative/--) Divyata Ved

After underperforming our expectations for 2017, we expect Denmark-based plastic packaging company Faerch Plast Group A/S' revenues willincrease by 19% in 2018, where 3% is organic and the rest reflects the acquisition of CGL. We expect adjusted EBITDA margins to increasefrom higher prices to compensate for sterling devaluation and due to improved management of contractual pass-through of resin costincreases. We anticipate an adjusted debt to EBITDA ratio of about 7.4x-7.5x in 2018-2019 and FFO to debt of 6.8%-7% in 2018-2019.

Floatel International Ltd. (CCC+/Negative/--) Edouard Okasmaa

Market conditions for float accomodation remain difficult, and we continue to view Floatel's capital structure as unsustainable. There is anoversupply of semisubmersible accommodation units and the magnitude and timing of any pickup in demand remains uncertain. Althoughthere has been a relatively strong increase in oil prices over the past few quarters, this has no significant short-term effect on theaccommodation rig segment. Long lead times for new work and investment decisions at oil companies push the timeframe for any sizable newcontracts to 2019-2020. In addition, there are a number of inactive rigs, which will intensify the competitive landscape.

Real Estate: Will Property Companies Hold Their Ground?

We rate four real estate companies in Sweden, three of them in the investment grade category.These companies are typically market leaders with large diverse property portfolios, and weassess them as having relatively strong business risk profiles. Generally, they displayabove-average asset quality, long-term contracted cash flows from creditworthy tenants, andfairly low vacancy rates. In our view, residential property in Sweden represents particularly lowrisk, especially in attractive areas, since rent levels are highly predictable because of supportiveregulation, structurally low occupancy rates, and indexation of rents to inflation. The outlook for





retail real estate is more mixed, however, with the best quality retail shopping centers able towithstand consumers' increasing preference for online shopping, while second-tier shoppinglocations will likely struggle. Office real estate is enjoying cyclical highs, backed by relativelystrong economic growth and high rent levels.

Investment-grade Swedish real estate companies typically aim to maintain loan-to-value (LTV)ratios lower than 50%, which provides good headroom to falling asset values. However, comparedwith their European peers, they typically have a shorter debt duration and are over-indexedtoward floating interest rates, which we believe slightly increases financial risk. A short-dateddebt maturity schedule could also weigh on our assessment of liquidity risk and, ultimately, on ourratings because it exposes companies to refinancing risk.

We see stable prospects for most Swedish real estate companies we rate in the near term, but themedium-term outlook is more clouded. Swedish prime property rent levels and valuations arecurrently at cyclical highs, boosted by low interest and capitalization rates, thriving investordemand, and relatively strong underlying economic fundamentals. However, the combination ofinflated asset values, expectations of gradual interest rate hikes in the coming years, andprogressively more aggressive financial policies point to a potential increase in risk for Swedishproperty companies over the medium to long term. Because capital costs represent a large shareof a real estate company's cost base, and interest rate coverage ratios are intrinsically low, even aseries of smaller interest rate hikes would increase the pressure on free cash flow generation andcash flow credit measures. Moreover, higher interest rates are likely to depress asset valuesthrough higher capitalization yields. In turn, this would reduce balance sheet flexibility, whichcould weigh on some of our ratings in the sector.

Table 6


Citycon Oyj (BBB/Negative/A-2) Marie-AudeVialle

Finland-based company Citycon Oyj owns a portfolio of €4.4 billion in retail property assets, diversified across the Nordic region. Our negativeoutlook indicates that we could lower the rating if our adjusted ratio of debt-to-debt plus equity for Citycon deteriorates to 50% or higher, or ifnegative operating trends continue. Further deterioration of credit metrics result from a negative portfolio revaluation that is greater than expected,coupled with slow progress in divesting noncore assets. We could also lower the rating if like-for-like rental income continues to decline in Finlandwith the income streams from Sweden and Norway only partly offsetting such a decline.

Akelius Residential Property AB (BBB/Stable/A-2) NicoleReinhardt

Akelius is a privately owned Sweden-based residential real estate holding company with a portfolio size of approximately SEK105 billion as of March31, 2018. The company is globally well diversified across 15 metropolitan locations, including Berlin, Stockholm, London, Paris, and New York. Weexpect continuously favorable market conditions for Akelius' main locations, where demand is outpacing supply, with overall like-for-like rentalincome growth of at least 3% for the next 12 to 18 months. We forecast the S&P Global Ratings' adjusted ratio of debt to debt plus equity will remainbetween 55% and 53% and EBITDA interest coverage ratio at 1.6x-1.7x.

Fastighets AB Balder (BBB/Stable/--) Marie-AudeVialle

Sweden-based real estate company Balder owns a diversified portfolio of SEK98.4 billion (€10 billion) assets across the Nordics. We anticipatecontinued favorable demand for prime residential, office, retail, and hotel properties in major Nordic cities, where Balder's portfolio is located, whilesupply should remain limited. We expect like-for-like rental income will grow by approximately 2% in the next 12 months, supported by modestindexation. We forecast that S&P Global Ratings-adjusted EBITDA interest coverage will remain above 3.0x and the debt-to-debt-plus-equity ratiowill remain below 60%.

Jernhusen AB (A/Stable/A-1) FranckDelage

Swedish real estate company Jernhusen, which owns railway stations (47% of revenues) and depos (42%) in Sweden's largest cities, should continueto benefit from strong economic fundamentals and favorable demand for rail travel. We anticipate rental income growth will increase by 3%-4% in2018-2019, mainly supported by the finalization of new developments in Stockholm, Uppsala, and Malmö. Investment spending should reach SEK1.0billion-SEK1.5 billion per year in 2019-2020 depending on the timing of project launches. As a result, the ratios of debt to debt plus equity and





EBITDA to interest should reach 48%-50% and 4.0x-4.3x, respectively, in 2019-2020. We still see a high likelihood of the company receivingextraordinary support from the Swedish government in case of financial stress, mainly due to its essential role to the Swedish railway network andvery strong link, since the company is 100% state owned.

Samhallsbyggnadsbolaget i Norden AB (publ) (BB/Stable) KathleenAllard

Samhällsbyggnadsbolaget i Norden AB (SBB) owns a SEK22.1 billion portfolio of community services and residential properties in Sweden andNorway, as well as other assets with development potential. We view SBB's markets as resilient and expect demand for its properties will remainrelatively high in the coming years, but its credit metrics, although improving, remain aggressive, in our view. We expect the company to showlike-for-like rental income growth of 1.0%-2.0% through 2018-2019, supported by positive inflation trends in Sweden and Norway and potential rentincreases following refurbishments, and a low-single-digit increase in portfolio value. We expect the S&P Global Ratings' adjusteddebt-to-debt-plus-equity ratio will slightly exceed 60% in 2018, before declining toward 55%-60% in 2019, and EBITDA-interest-coverage will beslightly below 2.0x in 2018 then move slightly beyond 2.0x in 2019.

Steen & Strom AS (A-/Stable/--) FranckDelage

Norway-based retail property company Steen & Strom owns and manages 18 shopping centers in Norway, Sweden, and Denmark, which are valuedat about NOK38 billion. We believe that the company will continue to generate high and constant footfall in the coming years, as well as a highoccupancy level. For 2018-2019, we expect relatively stable occupancy and like-for like rental income growth in line with inflation forecasts, as mostleases are indexed to CPI inflation. We anticipate the adjusted debt-to-debt-plus-equity ratio will remain at around 40% and the adjusted EBITDAinterest coverage ratio at about 3x in 2018-2019. Our rating on Steen & Strøm is equalized with that on its parent, French retail property companyKlepierre, which owns 56% of its shares, since we consider that Klépierre is likely to support Steen & Strøm under any foreseeable circumstances.

Forest And Paper Products: Strong Market Dynamics Will DrivePerformance In 2018-2019

Our ratings on Nordic forest product and paper companies benefit from improved financial creditmetrics, since the companies have reduced their exposure to the structurally declining publicationpaper products (such as paper used in magazines, catalogues, and commercial print). In addition,rated companies have finished the bulk of the large investments needed to increase their offeringsin more value-added segments, such as paperboard, containerboard, or self-adhesive labellingpaper products. As a result, since the end of 2016, Nordic pulp producers have generated strongcash flows, underpinned by favorable pulp and paperboard market conditions. This led, forexample, to improved credit metrics at UPM-Kymmene and Mesta Board, and we upgraded UPMto 'BBB' from 'BBB-' in July 2018 and Metsa Board to 'BBB-' from 'BB+' in February this year.

That said, pulp generates input costs for paper producers and a rise in pulp prices can thereforehave a diverging impact on a company's divisions, such as for UPM. In the first half of 2018, Nordicpaper, paperboard, and wood margins have narrowed, due to higher pulp, wood, chemical (that is,caustic soda), and fuel costs.

Our assessments of most Nordic forest product and paper producers' business risk profiles aresupported by the companies' large size, well-invested and efficient plants, and high degree ofvertical integration into pulp, wood, and energy. On the other hand, they are often constrained bythe cyclical nature of the industry, high reliance on a limited number of plants, capital intensity,the risk of unexpected plant closures, limited product diversification, and relatively high laborcosts in the Nordic region.

Although some rating headroom exists, the financial risk profiles of several companies (UPM,Mesta Board, and Holmen) remain constrained by their financial policies, which tolerate relativelyhigh financial leverage. We believe leverage could increase further if they pursued large,debt-funded acquisitions, investments, or additional shareholder payments.





Table 7


Svenska Cellulosa Aktiebolaget SCA (BBB/Stable/A-2) DesireeMenjivar

We expect SCA's revenues will increase by about 5% in 2018, due to a strong market environment for corrugated packaging, pulp, and solid-woodproducts. We expect the company to generate strong cash flows and apply them to fund investments and dividends in 2018 and 2019. Theexpansion at Östrand pulp mill (which began production in June 2018) will increase SCA's northern bleached softwood kraft pulp production toover 900,000 tonnes per year, while also increasing the level of efficiency within the group's pulp segment. We expect the positive pulp pricingenvironment and the additional volumes from Östrand to increase SCA's S&P Global Ratings-adjusted EBITDA margin to 22% by 2019, while weforecast FFO to debt will decrease to 33%-35% over the next two years as the company completes its large capex project.

Holmen AB (BBB+/Stable/A-2) DesireeMenjivar

Forest products group Holmen has strengthened its financial risk profile over the past two years. Increasing capacity within the paperboard andwood products segments has improved the group's profitability and cash flow generation, while consistent deleveraging has improved creditmetrics. We forecast the trend of strong cash flow generation to continue in 2018, as the market environments for paperboard and wood productsremain strong. Additionally, the group has positioned itself well within the paper segment, offering a high-bulk grade paper that is attractive tobook and magazine customers. Book and magazine paper now accounts for circa 90% of Holmen's paper sales and about 32% of total groupsales. We expect this to help insulate the company from the continued deterioration of the traditional paper market. Overall, we expect strongmarket conditions for forest products to continue, and over the next two years we expect FFO to debt will increase to over 100% and debt toEBITDA to decrease to below 0.8x. These metrics allow the company to invest in expansionary capex while maintaining the current rating.

UPM-Kymmene Corp. (BBB/Stable/A-2) DesireeMenjivar

Finland-based UPM-Kymmene is one of the largest and most diverse forest products companies in the world. It has decreased its exposure to thedeclining consumer paper segment and deleveraged the business, resulting in stronger credit metrics. In 2017, the financial performance of thebusiness benefitted from strong pulp prices, and we expect favorable market conditions will continue over the medium term, which will supportstrong cash flows. We forecast S&P Global Ratings-adjusted FFO to debt at 86% in 2018 and over 70% in 2019, while S&P GlobalRatings-adjusted debt to EBITDA is forecast at about 0.6x in 2018 and 0.3x in 2019. While these credit metrics have material headroom for thecurrent rating, we note that UPM's public guidance on financial policy suggests that the group would tolerate higher reported leverage of up to2.0x (we believe this would equate to S&P Global Ratings-adjusted debt to EBITDA of 2.5x). UPM might make a large (€2 billion) investment in asecond pulp mill in Uruguay. We believe such an investment would be funded from internal cash and only start in 2020.

Metsa Board Corp. (BBB-/Stable/A-3) DesireeMenjivar

We expect Finnish-based paperboard producer Metsa Board Corp. (MB) to continue to generate strong cash flows in 2018. MB completed thebulk of its capacity expansion in folding boxboard and white kraftliner at Husum. Demand for paper-based packaging remains strong, as shownby rising paperboard prices. We expect strong demand, favorable pricing trend, and the ramp-up of production at Husum to support revenuegrowth and profitability in 2018. We expect FFO to debt to exceed 45% and debt to EBITDA to remain below 1.7x over the next two years.

Nordic Packaging And Container (Finland) Holdings Oy (B/Stable/--) Divyata Ved

In June 2018, Nordic Packaging and Container Holdings (NPAC) completed the sale of its semichemical fluting business (Powerflute) to MondiGroup. NPAC's operations are now limited to the manufacture of coreboard and cores under the "Corenso" brand, where it holds a strong nicheposition. We expect sales growth of around 6% in 2018, as demand for coreboard and cores increases in Europe and the U.S.

Investment Holding Companies: Conservative Financial Policies AreShaping Some Swedish Industrials' Balance Sheets

We rate three investment holding companies in the Nordics, all based in Sweden. All three displayfinancial conservativeness, with low financial leverage. For example, their LTV ratios were below10% at the end of second-quarter 2018, demonstrating not only strong equity marketperformance, but also these entities' low financial risk tolerance over a cycle. Such policiessupport our strong ratings, as does a track record of active financial risk management over theequity market's cycle.

We also believe the investment holding companies have a positive impact on the balance sheets of





many industrial holdings in which they are actively investing. For example, Fredrik Lundberg, thePresident and CEO of L E Lundbergföretagen AB stated in the company's 2017 annual report that"a strong financial position provides resistance in an economic downturn and, above all, is aprerequisite for being able to capitalize on good business opportunities."

Since Mr. Lundberg is now also chairman of the board of another Swedish investment holdingcompany, Industrivärden, and controls almost 24% of the voting rights, his conservative financialpolicies are spreading to a wider set of Swedish industrial companies. Despite peak cyclicalconditions in many industries, Lundberg-influenced entities continue to deliver in order tostrengthen their balance sheets, which we believe supports creditworthiness as financial risk isreduced. This is reinforced by Mr. Lundberg's long-term ownership commitment and strong trackrecord of managing portfolio companies with low financial leverage throughout the business andeconomic cycle. In a similar vein, Investor AB has a long track record of cautious financialmanagement. Its strong financial position and track record of low leverage (see charts 20 to 22)underscore the relatively strong ratings on its listed portfolio companies.

Chart 20





Chart 21





Chart 22

Table 8


Investor AB (AA-/Stable/A-1+) PerKarlsson

We expect Investor will continue to benefit from high asset quality, with average portfolio credit quality in the investment grade category ('BBB-' andabove), solid portfolio liquidity with more than 75% of the assets in listed securities, and good portfolio diversification across industries. The threelargest assets Atlas Copco, ABB, and SEB constitute about 37% of the portfolio. The LTV ratio is well below the LTV threshold of 20%, giving the companyample headroom under the rating.

Industrivarden AB (A+/Stable/A-1) PerKarlsson

Industrivärden benefits from excellent asset liquidity despite the recent sale of SSAB shares, given its focus on listed minority stakes in entities thathave strong underlying credit quality. Most of the investee companies carry investment-grade ratings. That said, Industrivärden's portfolio exhibits onlymodest asset diversification, in our view, as the three largest assets--Sandvik AB, AB Volvo, and Handelsbanken--constitute more that 60% of theportfolio. Industrivärden sold a part of its holding in SSAB AB in April 2018 for SEK3 billion and the proceeds will be used to reduce debt. This wouldresult in a LTV ratio of 6.4%, down from about 10% at year-end 2017. Industrivärden intends to maintain the LTV ratio in the range of 0%-10%, which isin line with our expectations for a minimal financial risk profile.

L E Lundbergforetagen AB (A+/Stable/A-1) PerKarlsson

Lundbergs benefits from good overall credit quality of assets, most of which are investment grade. We consider Lundbergs' wholly owned real estateoperations to be very low risk, given their solid performance over the past decade, underpinned by residential properties (about 40% of the real estateportfolio in terms of rental income, or about 500,000 square meters of total floor space) and low vacancy rates (consistently below 5%). Furthermore,





the company also has a long-term strategy and track record of risk-averse investments, which is largely a function of its stable ownership structure,with the Lundberg family controlling more than 90% of the voting rights. However, the portfolio liquidity is restricted by a higher proportion of real estateassets (40%). The LTV ratio as of March 30, 2018, was 5.5% versus our threshold of 15%, meaning the company has substantial financial flexibility forthe current ratings.

Table 9


Swedish Match AB (BBB/Stable/A-2) Gerson P.Brown

We expect tobacco company Swedish Match's core business to continue generating strong earnings and free cash flow. We expect the group thegroup to defend its leading market positions in its core Scandinavian market supported by its innovation pipleline and well-recognized brandportfolio. We anticipate a debt to EBITDA ratio of 2.0x-2.3x in 2018, and a FOCF to debt ratio of 27%-32% in 2018.

AB Electrolux (A-/Stable/A-2) NicolasBaudouin

We expect Swedish home appliances manufacturer Electrolux to exhibit 2018 revenues similar to the 2017 levels, reflecting stable demand inmatured markets and growth in emerging markets, while the group prioritizes profitability rather than growth. For 2018 we expect an EBITDAmargin of 10.5%-11% and a debt to EBITDA ratio of 0.5x-0.7x.

Apoteket AB (A/Stable/A-1) Solene VanEetvelde

We anticipate that Swedish pharmacy chain Apoteket will focus on expanding its consumer markets segment by progressively opening newpharmacies and increasing its online sales capability, while the health care and enterprise segment remains stable. We expect a streamlining ofoperations with respect to personnel, IT, and marketing and relatively low capex, leading to an expected adjusted debt to EBITDA ratio of 1.0x-1.5x.

Securitas AB (BBB/Stable/A-2) Anna Stegert

We expect Swedish security services provider Securitas to exhibit revenue growth of 3%-7% in 2018 on the back of strong business conditions inNorth America, lower growth in Europe due to declining refugee-related sales, and fewer contracts, and relatively strong growth in Ibero-Americaamid favorable market dynamics. We expect the EBITDA margin to stay largely consistent with the 2017 level of 7.5% in 2018 and 2019. Weanticipate an adjusted FFO to debt ratio of about 32% for 2018 and 34% in 2019.

ISS A/S (BBB/Stable/--) Paul O'Reilly

We expect leading facilities services provider ISS to continue exhibiting modest revenue growth of about 2%-4% organically in 2018-2019. Supportin 2019 will come from the launch of the recently won Deutsche Telekom contract, which we expect will contribute 2% to revenue growth. Weanticipate an adjusted EBITDA margin of 7.0%-8.0% in 2018-2019 and continued strong free cash flow generation of about DKK2.8 billion in 2018and DKK 3.5 billion in 2019. In line with the group’s financial policy, we anticipate the group will distribute excess cash to shareholders, leading tooverall stable credit metrics, with debt to EBITDA at 2.9x-3.2x in 2018, followed by 2.6x-2.9x in 2019.

Novo Nordisk A/S (AA-/Stable/A-1+) NicolasBaudouin

We believe Novo Nordisk will maintain its well-entrenched global market position as the leader in medication to treat diabetes. We expect thegroup to retain a conseravative financial policy and robust free cash flow generation based on a strong pipeline and new products with cleartherapeutic advantages. We expect the group to maintain a net cash position throughout 2018.

Unilabs Holding AB (B/Stable/--) Gerson P.Brown

After the major acquisitions of Base Holding and Alpha Medical in 2017, we believe Sweden-based diagnostic lab operator Unilabs Holding AB isunlikely to engage in acquisitions, with revenues increasing by 28%-33% in 2018, reflecting the full-year contribution of the Alpha and Baseacquisitions. We believe that Unilab's continued focus on operating efficiency and increaing exposure to specialty volumes will support steadyimprovement in reported profitability metrics with adjusted EBITDA margins of 22.5%-24.5% in 2018-2019. We expect an adjusted debt to EBITDAratio of 12.0x-13.0x in 2018 and 11.0x-12.0x in 2019.

Molnlycke Holding AB (publ) (BBB-/Stable/A-3) MarketaHorkova

We expect Sweden-based medical equipment manufacturer, Molnlycke, to maintain its leading market positions and show revenue growth of2%-3% in 2018 and 2019, thanks to new product launches and growing exposure to the U.S., Asia, and other emerging markets, partly mitigatingthe ongoing challenging environment in Europe. We expect an adjusted EBITDA margin of 28% and a debt to EBITDA ratio of 3.6x in 2018.

Transcom TopCo AB (B/Stable/--) Anna Stegert

We believe that Swedish customer-relationship management group Transcom will see a contraction of its revenues of about 3% in 2018 due to the





reduction of loss-making contracts. Beginning in 2019, we expect low single-digit growth alongside stabilizing operations and expansion inhigher-growth end markets such as retail and health care. We expect profitability to increase as management rolls out its cost-savings programfocusing on rightsizing operational capabilities and reorganizing support functions, as well as acquisitions in more profitable segments continue.We anticipate adjusted FFO to debt of about 10% in 2018 and 12%-14% in 2019.

Essity AB (BBB+/Stable/A-2) BarbaraCastellano

We believe that Essity, a Swedish household products company, will continue to post positive results in the Personal Care division in 2018, whilestill facing pressure in the Consumer Tissue segment, as raw material costs continue to rise and overcapacity in Europe persists. We expect thatEssity will continue to cope with the increasing pulp costs in 2018 by raising selling prices. Essity has shown a strong focus on cost structureefficiency, as exhibited by the 2017 "cure or kill" efficiency program, which led to the group closing factories in India and Mexico. We believe thegroup will maintain such a focus on cost efficiencies, which should partially offset the negative impact of rising raw materials costs on EBITDAmargins. Additionally, we expect the full year impact of the 2017 acquisition of medical solutions company BSN to further support EBITDA marginswhile also contributing to revenue growth in 2018. Overall, for 2018, we forecast sales growth of 3.0%-3.5% and S&P Global Ratings-adjustedEBITDA margins of 17.0%. We foresee S&P Global Ratings-adjusted debt to EBITDA of about 2.7x in 2018 and 2.4x in 2019, with FFO to debt at 28%in 2018 and 32% in 2019. We note that Essity has completed several acquisitions in the past few years, but we assume that any significant newacquisition will be completed only if it does not trigger a downward revision of the financial risk profile, since we understand that the group iscommitted to maintaining an investment-grade rating.

A.P. Moller - Maersk A/S (BBB/Watch Neg/--) IzabelaListowska

Our rating on Maersk is on CreditWatch negative, reflecting Maersk's transformational transaction, including the sale of its oil- and gas-relatedbusiness. This will result in the loss of diversification benefits that we previously factored into our rating on Maersk. That said, we still believe thatif the company were to apply a significant part of the proceeds from the divestment towards debt repayment, this could allow us to affirm therating.

Silk Bidco AS (B-/Stable/--) JacobKuriakose

We believe Norwegian cruise ship operator Silk Bidco AS (trading as Hurtigruten AS) will exhibit double-digit revenue growth in 2018, 2019, and2020, on the back of growth among its main customer group, affluent retirees. We expect an increased S&P Global Ratings-adjusted EBITDAmargin of about 20% for 2018 due to increased occupancy rates and lower exceptional costs. We anticipate an adjusted debt to EBITDA ratio of8.5x and an FFO to debt ratio of 6%-8% in 2018.

SAS AB (B+/Stable/--) IzabelaListowska

We expect Sweden-based airline operator SAS' sales will rise by slightly more than 2.0% in 2018, mainly as a result of increased capacity on longer,European routes and the comissioning of 10 Airbus A32neo aircraft to replace smaller-capacity aircraft. We anticipate the S&P GlobalRatings-adjusted EBITDA margin will remain at 15%-17%. For 2018, we expect adjusted weighted average FFO to debt of about 20% and anadjusted debt to EBITDA ratio of about 3.5x.






Contact List

PRIMARY CREDIT ANALYST PRIMARY CREDIT ANALYST PRIMARY CREDIT ANALYST

Per Karlsson

Stockholm

(46) 8-440-5927

[email protected]

Mikaela Hillman

Stockholm

+ 46 84 40 5917

[email protected]

Sandra Wessman

Stockholm

(46) 8-440-5910

[email protected]

PRIMARY CREDIT ANALYST PRIMARY CREDIT ANALYST SECONDARY CONTACT

Gustav B Rydevik

London

+ 44 20 7176 1282

[email protected]

Thierry Guermann

Stockholm

(46) 8-440-5905

[email protected]

Andreas Kindahl

Stockholm

(46) 8-440-5907

[email protected]


Edouard Okasmaa

Stockholm

(46) 8-440-5936

[email protected]

Marie-Aude Vialle

London

+ 44 20 7176 3655

[email protected]

Raymond Satagaj

Stockholm

[email protected]

SECONDARY CONTACT ADDITIONAL CONTACT

Desiree I Menjivar

London

+ 44 20 7176 7822

[email protected]

Industrial Ratings Europe

[email protected]





Nordic Insurers: Digitalization Is A Key ToOperational EfficiencyMay 2, 2018

S&P Global Ratings believes that Nordic insurers' recently published 2017 results are a show ofcontinued strength. A solid performance, in particular by property/casualty (P/C) insurers, stemsfrom their commitment to underwriting discipline and cost efficiency. In parallel, the performanceof life insurers benefitted from increased efforts to manage the back book of existing policies andcost reduction, supported by fee income from unit-linked business and asset management.What's more, insurers managed to keep up solid performances during a year of continuously lowinterest rates and investments to meet evolving regulation and upgrade IT systems. We believethat the use of well-established digital solutions supported the continued strong results.

Key Takeaways

- The Nordic insurers we rate again delivered strong results in 2017, with key metrics inline with or better than we expected.

- We find our rated companies well positioned to cope with stubbornly low interest rates,but remain vulnerable to severe economic downturns in our base-case scenario.

- We believe Nordic insurers' will strive to remain ahead of European peers in terms ofefficiency and digitalization.

We rate 18 Nordic insurance companies/groups, ranging from traditional life and P/C players toniche companies, such as protection and indemnity clubs and insurance subsidiaries of banks orcorporate groups. Their average financial strength rating is in the 'A' range, supported by therecent upgrade of Finland-based Alandia to 'A-' in January this year. This compares well with the'A' average for insurers we rate in Western Europe; and is higher than our 'BBB' average rating onNordic corporate entities, while close to our 'A+' average rating for Nordic banks.

Product And Underwriting Strategy Has Paid Off

In 2017, rated Nordic insurers' results, both from underwriting and investments, were generally inline with or above our base-case expectations (see table 1). In particular, investments producedhealthy returns, reflecting the relatively high share of high-risk assets in companies' investmentportfolios. For example, more than 50% of investments of the Swedish insurance market were inthe form of equities and participations at year-end 2016. However, the high amount of high-risk

Nordic Insurers: Digitalization Is A Key ToOperational EfficiencyMay 2, 2018


Simon Kristoferson

Stockholm

(46) 8-440-5902

[email protected]

Sebastian Dany

Frankfurt

(49) 69-33-999-238

[email protected]

SECONDARY CONTACTS

Volker Kudszus

Frankfurt

(49) 69-33-999-192

[email protected]

Jure Kimovec, FRM, CAIA, ERP

Frankfurt

(49) 69-33-999-190

[email protected]

RESEARCH CONTRIBUTOR

Kalyani Bhagwat

CRISIL Global Analytical Center, anS&P Global Ratings affiliate, Pune

ADDITIONAL CONTACT

Insurance Ratings Europe

[email protected]

www.spglobal.com/ratingsdirect May 2, 2018 1

assets also increases potential volatility in the companies' results.

Table 1

Rated Insurers Outperformed Our Forecasts In 2017

2018f 2017f 2017a 2016a

Gjensidige

Gross premiums written (mil. NOK) ~28,500 ~27,500 25,917 26,822

Net income (mil. NOK) ~4,000 ~4,000 4,519 4,666

P/C net expense ratio (%) ~14 ~14 15 14

Net combined ratio non-life (%) 86-89 86-89 85 83

Sampo

Gross premium written (mil. €)* ~5,500 ~5,500 5,996 5,548

Net income (mil. €) ~1,300 ~1,300 2,239 1,650

Net combined ratio non-life (%) ~88 ~88 82 85

Return on equity (RoE) (%) >11 >11 17 15

Länsförsäkringar Alliance§

Net income (mil. SEK) >2,000 >7,000 8,919 6,279

Net combined ratio non-life (%) ~95 ~95 92 94

Return on equity (RoE) (%) >4 >10 11 13

Kommunal Landspensjonskasse


Net income (mil. NOK) 1,200-1,500 ~1,500 1,404 2,807

Life: prebonus pretax earnings/totalassets (%)

~0.5 ~0.5 0.5 0.5

Storebrand Livsforsikring


Net income (mil. NOK) 1,200-1,400 1,200-1,400 1,805 1,520

Return on shareholders' equity (%) ~5 ~5 7 6

*For 2017, Topdanmark is consolidated in Sampo's reported figures, but is not part of our forecast. Without Topdanmark, our forecasts are inline with actual outcomes. §Länsförsäkringsgruppen, known as the Länsförsäkringar Alliance, includes all non-life business, LänsförsäkringarFondliv and Länsförsäkringar Bank. NOK--Norwegian krone. SEK--Swedish krona. f--S&P Global Ratings' forecast. a--Actual outcome. Sources:S&P Global Ratings' publications and companies' published annual reports.

Several years of low interest rates have reduced returns from fixed-income investments andheightened reinvestment risk for life insurers whose back books contain policies with guaranteedreturns. Yet our ratings on Nordic insurers have stayed largely stable (see charts 1 and 2). Thisshowcases the measures companies have taken to mitigate lower yields. For example, lifeinsurers have been moving toward capital-light products.


Nordic Insurers: Digitalization Is A Key To Operational Efficiency

Chart 1

Chart 2



Nordic Insurers Are Frontrunners In Efficiency And Digitalization InEurope

We don't expect the operating environment for Nordic insurance will change much over the comingtwo to three years, due to limited organic growth opportunities and high barriers for marketentrants. In addition, Nordic insurers we rate are generally well established, with well-knownbrands and long-standing distribution networks.

Nordic P/C insurers' expense ratios are significantly lower than those of counterparts in manyother European markets (see chart 3), and some larger companies' expense ratios are even lowerthan the Nordic average (see chart 4).

We believe the focus on cost efficiency will continue, and also anticipate some furtherconsolidation on the asset-management side (for example Danica's acquisition of SEB Pension inDenmark and Storebrand's acquisition of Skagen) to improve cost efficiency.

Chart 3



Chart 4

One element of improving cost efficiency is the savings resulting from investments indigitalization, which so far has made its way into areas such as claims handling, invoicing, digitalhealth declarations, and robotics. Nordic companies, for example, have increased the number ofpolicies sold via the internet or mobile devices and have sped up claims handling (see table 2). Webelieve they have already implemented smart, digital solutions that many European peers have ontheir agendas but still are lacking.

Alongside individual Nordic insurers' digitalization initiatives, we note a large number of insurtechstart-ups in the Nordic region (in Sweden alone, more than 15 companies). These entities arefocusing on various parts of the insurance value chain, but especially on distribution. A clearmajority of them are cooperating with insurers, rather than competing with them as insuranceproviders.

Table 2

Nordic Insurers--Selected Digitalization Investments

Achivements Initiatives

Gjensidige Travel claims handled in 1.6seconds - applied for entry to theGuinness World Records

In 2015-2022, participation in a research collaboration with, amongothers, the University of Oslo, the University of Bergen, and theNorwegian Computing Centre on several projects that are expected togive new insight into topics related to the processing of large datavolumes (big data). Examples include risk pricing, forecasts, and trendanalyses and insurance fraud.

If 26 million visitors to If's website in2016, up 30% on 2015

To reinforce competitiveness, the private business area remainscommitted to creating a superior customer experience of products andservices, in part through continued digitalization initiatives targetingincreasing customer demands and continuous improvement of If’soffering.



Table 2

Nordic Insurers--Selected Digitalization Investments (cont.)

Achivements Initiatives

KLP The main delivery in 2017 was acomplete relaunch of the loginpages with simpler, moreuser-friendly web pages.

KLP’s pension platform is intended to offer a competitive advantage,and the company is working to develop it further to adapt it to futuremarket conditions. Development of services based on customerinsights and the creation of simple self-service and guidance solutionsis a priority.

LF Investments in digital development,such as the launch of a digitalpurchase service whereself-employed persons can take outoccupational pensions directlyonline.

Focus on innovative development activities with fast productdevelopment and testing operations to deliver new services quickerand at a lower cost and then continuously test and fine-tune them.Partnerships and investments in innovation companies supplementsuch development efforts. Länsförsäkringar will continue to developrobotics and automation to enhance efficiency.

OP Group In 2017, the new op.fi beganproviding banking and insuranceservices on a large scale to privateand corporate customers.

OP Financial Group invests more than €400 million annually to developnew products and services and modernize technology. Currently,roughly 95% of this amount goes toward the further development ofexisting businesses or financial services, and about 5% to newbusinesses.

Storebrand Increased digitization of customercommunication.

The digital tool “Find your pension figure” assembles all pensionschemes from present and past employers, national insurance, andown saved funds. In this way, we assist our customers inunderstanding the future value of current savings, to better enablethem to make safe choices today in order to have a better pension inthe future. More than 250,000 Norwegians have found their pensionfigures since the launch in 2013.

Sources: Companies' published annual reports and investor presentations.

The full potential of digitalization is still far off, in our view, and over the longer term insurers thatcannot mobilize technology to their advantage may be left behind. Therefore, we believe Nordicinsurers will continue to invest in digitalization in the coming years to maintain efficiency and tooffer customers the best service.

However, we do not see technology developments as a sectorwide rating driver in 2018, but moreover the medium- to longer-term (see "EMEA Insurance Outlook 2018: Managing Legacy IssuesShould Not Distract From Adjusting To Demanding New Trends," published Dec. 12, 2017).

Related criteria

- Insurers: Rating Methodology, May 7, 2013

Related research

- P&I Sector Remains Strong Despite Market Pressure, Feb. 20, 2018

- Finland-Based Insurer Alandia Upgraded To 'A-' Following Sustained Asset Derisking; OutlookStable, Jan. 25, 2018

- Nordic Insurers: Property/Casualty Earnings Stay Strong, While Life Insurers Are In Transition,Nov. 22, 2017

- InsurTech: Buzzword, Emerging Challenge, Or Long-Term Opportunity?, Nov. 22, 2016



Our Stress Tests Show Swedish LRGs To BeVulnerable To Interest Rate HikesAugust 15, 2018

(Editor's Note: This article is an abridged version of the report "No Stress: Rated LRGs In Europe, Canada, And Argentina Can CopeWith Possible Interest Rate Rises," published Jan. 29, 2018.)

Monetary policy globally has been accommodating since the global financial crisis of 2008, withinterest rates reaching and remaining at record lows. This has translated into historically lowborrowing costs for many rated local and regional governments (LRGs). Some LRGs have benefiteddirectly from lower borrowing costs, and others indirectly, through low-cost funding from theirrespective sovereigns. As a result, interest expenditure has gradually diminished as a proportionof LRGs' budgets. This has given many of our rated LRGs much-needed breathing space for fiscalconsolidation.

In recent months, several of the world's key monetary authorities either have started increasinginterest rates, or have signaled the possibility of a change in stance. We cannot predict the timingor extent of increases in funding costs for LRGs. However, in light of the LRGs' historically lowfunding costs, we have examined how they would cope with an entirely hypothetical increase intheir funding costs to test their relative resilience to such a scenario.

S&P Global Ratings has conducted a series of stress tests on a sample of the LRGs that it ratesglobally, and found that they are in a good position to withstand a scenario of future interest rateincreases. In particular, we don't expect potential rate rises of up to an average of 6% on new debtto have a meaningful effect on the LRGs' main budgetary and debt metrics. Our sample containedSwedish municipalities and cities, Spanish autonomous communities, French and Italian regions,Canadian provinces, Swiss cantons, and German states. Argentinian provinces would also be ableto withstand substantial rate increases. The reason for the LRGs' resilience largely lies in ongoingbudgetary consolidation processes that limit the need for new funding, a high proportion offixed-rate, long dated debt, and in their proactive refinancing since the financial crisis.

Overview

- Our interest rate stress tests on our sample of our LRG sectors showed that they are wellprepared for potential interest rate shocks.

- Swedish LRGs appear the most exposed, even taking into account their hedging ofvariable-rate instruments, but the impact is manageable in all interest rate stressscenarios.

Our Stress Tests Show Swedish LRGs To BeVulnerable To Interest Rate HikesAugust 15, 2018


Alejandro Rodriguez Anglada

Madrid

(34) 91-788-7233

[email protected]

SECONDARY CONTACTS

Carl Nyrerod

Stockholm

(46) 8-440-5919

[email protected]

Felix Ejgel

London

(44) 20-7176-6780

[email protected]

Daniela D Brandazza

Mexico City

(52) 55-5081-4441

[email protected]

Mehdi Fadli

Paris

(33) 1-4420-6706

[email protected]

Alois Strasser

Frankfurt

(49) 69-33-999-240

[email protected]





Our Interest Rate Stress Tests

Overall, we estimate that the budgets of the LRGs we analyzed are only moderately sensitive tointerest rate increases in the short-to-medium term. Years of funding at low interest rates, longmaturity dates, and fixed interest rates have left LRGs in a relatively strong position to absorb ahypothetical increase in the interest rate on their new debt issues. In many cases, it would take anincrease of several percentage points in the cost of new debt to have a meaningful bearing onthese sectors' budgetary trajectories. Moreover, interest rate increases, if and when they happen,are likely to be gradual, rather than abrupt, and would therefore give governments an opportunityto react and adjust.

While overall sensitivity is moderate, we saw differences between sectors. The sectors mostexposed to an interest rate shock are those with high proportions of variable-rate debt, lowaverage maturities, and high funding needs. These sectors would see the proportion of theiroverall debt portfolio at the new, higher interest rates, rise faster (see table 1).

Table 1

Factors Affecting The Relative Sensitivities Of European And Canadian sectors

(%)

Swedishmunicipalities

and citiesSpanishregions

Argentinianprovinces

Frenchregions

Italianregions

Canadianprovinces

Swisscantons

Germanländer

Proportion ofvariable-rate debt,2017 (S&P GlobalRatings' estimate)

43 17 18 25 18 13 7 7

Maturities as apercentage of stockof debt (2017-2019average, pre stress)

28 10 13 7 4 6 8 13

Balance aftercapital accounts asa percentage oftotal revenues(2017-2019base-case average,pre stress)

(1) (5) (5) (1) (1) (6) (3) 0

Even in 2019, with the cumulative impact of two years of stress, and at the highest interest rate onnew debt we modeled (6%; our extreme scenario), we expect only moderate changes in the keybudgetary and debt metrics of our rated LRGs (see table 2).




Our Stress Tests Show Swedish LRGs To Be Vulnerable To Interest Rate Hikes

Table 2

Comparative Impact Of Our Highest Stress Scenario* By Sector

Operating balance as apercentage of

operating revenues2019

Balance after capitalaccounts as a

percentage of totalrevenues 2019

Tax supported debt as apercentage of

consolidated operatingrevenues (2019)

Interest as apercentage of

operating revenues(2019)

Basecase

Higheststress (6%

interest rateon new debt)

Basecase

Higheststress (6%


Basecase

Higheststress (6%


Basecase

Higheststress (6%


Swedishmunicipalitiesand cities

3.9 (0.2) (1.5) (5.4) 86.2 88.4 1.2 5.3

Spanish regions 1.5 (2.2) (4.3) (7.9) 201.1 207.6 2.9 6.6

French regions 18.8 17.3 (0.9) (2.2) 105.5 108.1 2.2 3.7

Italian regions 3.2 2.9 (1.1) (1.4) 44.2 44.9 1.3 1.6

Canadianprovinces

4.0 2.4 (5.4) (6.9) 209.8 212.9 7.4 9.0

Swiss cantons 3.9 2.8 (4.1) (5.2) 70.0 71.8 0.9 2.0

German states 8.1 6.9 0.6 (0.6) 123.5 124.6 3.0 4.2

*Highest stress scenario--6% interest on new debt.

Having said that, there may be meaningful differences across individual LRGs within each sector.LRGs that depart significantly from sector norms--because of greater reliance on variable-ratedebt or higher overall funding needs, for example--would have greater exposure. Moreover, in astress scenario, individual entities may make diverse policy responses. In our view, the degree ofpolitical commitment to budgetary stability, as well as the relative abilities of financialmanagement teams, could make a meaningful difference to the eventual impact of an interestrate shock.

Swedish municipalities and cities show moderate direct sensitivity, mitigatedby hedging policies and risk transfer from their on-lending activities

The Swedish municipalities and cities are the most sensitive to interest rate stress of all the LRGsectors we tested, due to their relatively high proportion of variable-rate debt and the highturnover of their debt portfolios. However, the only meaningful impact on these entities' operatingbalances occurs in the extreme scenario of a 6% interest rate on new debt, assuming a lack ofgovernment response.

We currently expect Swedish municipalities and cities to post moderate deficits after capitalaccounts, at about 1.5% of total revenues in our 2019 base case. Given Swedish entities' currentlow costs of financing, a moderate interest rate of 3% on new debt would lead the balance aftercapital accounts to deteriorate to about 3% of total revenues by 2019, absent any correctivemeasures. In our extreme scenario, the deficit in 2019 would rise to 5.4% of total revenues. By ourestimates, the impact on debt would be relatively moderate, with tax-supported debt increasingfrom our estimate of 86% of consolidated operating revenues in our 2019 base case to about 88%in our extreme scenario.

By our calculations, our rated Swedish municipalities and cities hold about Swedish krona (SEK)





195 billion in outstanding direct debt. The reason that the Swedish municipalities are relativelysensitive to an interest rate increase is their high proportion of variable-rate debt, even aftertaking into account interest rate hedging. However, rated Swedish municipalities and cities, lendabout half of their direct debt to self-supporting subsidiaries within the housing and utilitiessectors. For funds lent on, the municipalities charge a market-based premium on top of theirfunding costs, and so pass the cost of servicing the debt on to the subsidiaries. In practice, theultimate borrowers of the loans (housing and utility companies) assume the interest rate risk, andcould then pass it on to tenants and customers by adjusting rents or fees. Moreover, the whollyowned companies receiving the on-lent funds typically manage their interest rate risk on anindividual basis by contracting hedging derivatives. This set-up allows for an additional indirectinterest rate sensitivity hedge above what our calculated ratios suggest.

We estimate that about 43% of total debt in our sample at year-end 2017 is variable-rate posthedging. Swedish entities currently benefit from liquid markets and cheap funding and have arelatively high proportion of short-term funding, resulting in a high rate of turnover in their debtportfolio. For example, we estimate that Swedish entities' amortization volume in each year of ourforecast represents about one-third of the total stock of outstanding debt. This translates intohigh exposure to variable interest rates and frequent refinancing depending on market rates.

This means that by the end of our forecast period, almost all the debt of the Swedish entitieswould have been repriced. In recent years, while the municipal sector's debt stock has beennoticeably increasing as a percentage of revenues, debt is now twice that in 2000, and has fundedinvestments in real estate, housing, and public infrastructure. In spite of the notable increase indebt, Swedish municipalities and cities have taken advantage of the extraordinarily low interestrates and the short-term structure and duration of their debt, as nominal interest payments haveactually decreased since 2000.

Swedish entities' financial management is typically among the highest in our rated universe ofLRGs, so we expect they would react to the interest rate stress by taking measures to preservetheir creditworthiness.

Related Research

- Nordic LRG Debt Is Getting Larger And Greener, Feb. 22, 2018

- Comparative Statistics: European Local And Regional Government Risk Indicators, Jan. 23,2018

- Increasing Capital Costs Could Test Sweden's Local Governments, Dec. 12, 2017






Contact List

PRIMARY CREDIT ANALYST SECONDARY CONTACT SECONDARY CONTACT

Alejandro Rodriguez Anglada

Madrid

(34) 91-788-7233

[email protected]

Carl Nyrerod

Stockholm

(46) 8-440-5919

[email protected]

Felix Ejgel

London

(44) 20-7176-6780

[email protected]


Daniela D Brandazza

Mexico City

(52) 55-5081-4441

[email protected]

Mehdi Fadli

Paris

(33) 1-4420-6706

[email protected]

Alois Strasser

Frankfurt

(49) 69-33-999-240

[email protected]

SECONDARY CONTACT RESEARCH CONTRIBUTORS RESEARCH CONTRIBUTORS

Stephen Ogilvie

Toronto

(1) 416-507-2524

[email protected]

Marta Saenz

Madrid

+34 917887231

[email protected]

Alessandro Crocco

Milan

(0039) 02 72111290

[email protected]

RESEARCH CONTRIBUTORS ADDITIONAL CONTACT

Andres G Sicouri

Buenos Aires

[email protected]

SovereignEurope

[email protected]





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