Portfolio Manager comment Coeli Nordic Corporate Bond Fund R-SEK February 2020

Nordic Corporate Bond Fund (Class R) declined during February with 0.97 percent. Since year-end, the NAV per share has consequently decreased by 0.33 percent. The month saw a dramatic development in the financial markets. During the first three weeks, the positive trend was maintained, but the closing week offered a sharp fall in prices for virtually all risky assets. The trigger was that the market seemed to have completely change its attitude over a weekend about the economic consequences of the spread of the COVID-19 virus.

In the credit markets, significantly higher credit spreads were noted with the worst development for US high yield companies, where the spreads increased by about 140 basis points. Credit spreads also rose significantly in the European and Nordic markets, although not quite as much as in the US. Initially, activity in the primary market was high with several transactions, but towards the end of the month activity came to a full stop and several announced issues were canceled.

Among the positive contributors was consumer credit company 4Finance, which presented its financial statements at the end of the month. Net interest income came in lower than in the previous year, this was offset by good cost control and a somewhat lower proportion of loan losses. The company continues to focus on profitability and steers its lending to more credit worthy customer segments.

The housing developer Magnolia Bostad also made a positive return contribution, the company’s annual report showed a marked reduction in sales during the year, while the result improved considerably thanks to revaluations of the property portfolio. The comments from the company’s management were consistently positive and the demand situation is considered very good. Magnolia’s liquidity is at a satisfactorily high level and the company announced that it intends to repay the bond that matures in May 2020 without turning to the market for refinancing.

On the negative side one primarily found bonds from Melin Group that came under pressure after an investigation presented a proposal for lower debt collection fees in Norway. If the proposal is implemented in its current form, it is expected to result in a noticeable loss of revenue for Melin Group and thereby depress profitability. At the end of the month, the company presented its year-end report which showed improved operating profit for the fourth quarter, the forecast for 2020 was repeated, indicating a continued improvement in profitability, excluding any effects from lower collection fees.

Intrum also placed itself on the list of negative contributors as the Fund’s bonds fell in value by just over 6 percent. The holding of Intrum has a relatively high market risk due to the combination of credit spread and time maturity; the company is also assumed to have ended up in the crossfire as a result of about one fifth of the business being attributable to Italy. Golar LNG Partners’ bonds also retreated significantly, but this is largely explained by the poor liquidity in the Norwegian submarket. During the month Golar reported slightly stronger earnings than expected for the fourth quarter and slightly falling leverage. The company is expected to address a forthcoming bond maturity in the coming months, the refinancing may include major changes in the company structure and probably also a significant reduction in the dividend, which is currently considered to be unsustainably high.

During the month, the holdings of bonds deemed to have relatively high market risk were reduced, the automotive supplier Swedish Electro Invest and the paper company Ahlstrom Munksjö left the portfolio and the holdings of bonds from Teekay LNG Partners were reduced. Among the Fund’s holdings of bonds from real estate companies, the holding of Kungsleden were divested in favor of an investment in Castellum. An additional investment was made in the chemical tanker company Stolt-Nielsen, even though the demand for the company’s services is cyclical, the outlook is considered positive. For the first time in several years, the company reports that contract rates are being renewed at higher levels, while deliveries of new tonnage are expected to be at low levels over the next two years.

February’s biggest news headlines stems from the outbreak of the Corona virus, which spread from Asia to other parts of the world. Currently, there are around 84,000 known cases of the virus and about 2,900 people have died because of the virus. Most of these cases are still found in China, but Italy and Iran have also seen a high number of people affected. The increased concern for a global pandemic has left a deep imprint on the world’s financial markets, the last week of February saw major declines in most asset classes. Both Nasdaq Composites and the S&P 500-index saw a decline of more than 10 percent over this week, which was the biggest decline in a week since the 2008 financial crisis. The companies with the largest decreases are, to no one’s surprise, travel related with aviation and cruising leading the pack.

The effects of the Coronavirus were discussed at the Fed-meeting in January and at the time of writing we know that the Fed made an “emergency rate cut” in the beginning of March. This is the first rate cut between two Fed-meetings since the financial crisis. US stock exchanges initially received the cut relatively well with a slight upturn, and then quickly traded down and closed the day at about minus 3 percent.

In the trade conflict between China and the US, it was announced that China will cut custom duties by half on goods worth US 75 billion by 14^th of February. This is positive as the Phase One agreement is proceeding as planned.

Brexit is now in the transition phase after the UK left the EU in January. EU Ministers of the member states gathered in Brussels at the end of the month and confirm they are ready to offer a “significant, ambitious and comprehensive” partnership with the UK. At the same time, the UK is preparing its mandate for the start of negotiations, expected in early March.

The strategic review from the ECB which will last all year, has given the central bank some time to digest economic indicators in the region. Statistics released during the month showed that the euro area’s GDP rose by 1.0 percent in the fourth quarter of 2019 and that the inflation rate reached 1.4 percent in January, both figures being roughly in line with expectations. German inflation statistics for February showed a reading of 1.7 percent, which is approaching the ECB’s inflation target of 2 percent.

The European and American credit markets showed sharply rising credit spreads in both the high-yield segment and the investment grade segment during the month. The Nordic credit market has not shown the same volatility, although credit spreads have risen here as well. Stibor 3-month was noted at 0.14 percent, which is a slight decline since January. The Swedish 10-year government bond was listed at -0.29 percent at the end of the month and has thus fallen sharply since the turn of the year. The US 10-year Treasury bond was listed at 1.15 percent at the end of the month, notable is that exactly one year ago, the US 10-year Treasury bond stood at 2.68 percent. Thus, a sharp fall in interest rates in the U.S. as well.