This report provides a detailed account of the Swedish corporate bond market. Based on original data, it offers an overview of how the market has developed in the past two decades with respect to, among other things, size, issuer characteristics, risk profile and liquidity. In particular, it documents how the market has changed since the 2008 financial crisis and explores the increasingly important role of real estate companies in the local bond market. It also offers a comparison of the Swedish market with selected peer countries (European and non-European), both in terms of market structure and relevant regulation.
The Swedish Corporate Bond Market and Bondholder Rights
OECD Capital Market Series
Abstract
Executive Summary
The Swedish corporate bond market for non-financial companies is relatively young and has changed significantly over the past two decades. While the dominance of banks in credit provision has decreased, Swedish corporations remain highly dependent on bank financing in an international context. Until 2008, the corporate bond market did not expand much and was dominated by a small number of large and established companies within a limited number of industries. However, this began to change after the 2008 financial crisis as the market started growing, notably in response to stricter international banking regulation and contractions in bank lending for certain market segments. The average annual amount of non-financial corporate bonds issued in the period from 2009 to 2021 was more than twice that of the pre‑crisis period from 2000 to 2008. By the end of 2021, the total outstanding amount of non-financial corporate bonds was USD 77 billion, more than double the amount at the end of 2008. In parallel, the general credit quality has also decreased, ever since 2000 but most notably since 2009.
In the past decade and a half, the share of issuance made up by new issuers has significantly increased, with a simultaneous decrease in the median issue size. These developments are indicative of an increased accessibility and expansion in the use of corporate bond markets among smaller Swedish companies. More recently, real estate companies have also become significant players on the Swedish corporate bond market, representing as much as 48% of total issuance and 39% of outstanding amounts in 2021.
As more companies gain access to the market, corporate bonds are increasingly being issued in the domestic currency. The share of bonds denominated in the Swedish Krona has averaged 45% by amount in the last ten years, compared to negligible levels in the first decade of the 2000s. However, as many Swedish companies are active internationally and have revenues in several different currencies, the issuance of corporate bonds denominated in foreign currencies, most notably in Euros but also in US dollars, remains significant. This is also reflected in the investor landscape – foreign investors are the largest owners of Swedish non-financial corporate bonds, holding 60% of total outstanding amounts at the end of 2020. An important recent ownership trend is the growth of investment funds as holders of corporate bonds. At the end of 2020, they represented 43% of domestic ownership, compared to less than 5% in 2008. Direct retail participation in bond markets is limited. In contrast to what can be observed in many other markets, pension funds and insurance companies are not significant direct investors in non‑financial corporate bonds in Sweden.
In spite of significant improvements in the past decade, the Swedish corporate bond market still faces challenges that must be addressed so that the market can fulfil its role of providing companies with resilient, flexible financing. The COVID‑19 crisis clearly showed its inability to do so, as large segments of the market lost access to financing, and several investment funds had to temporarily close due to a lack of reliability in pricing. Contrary to other, more developed markets, in Sweden the corporate bond market is still pro-cyclical, limiting the access to market‑based financing in times of crisis to a small number of large and established companies. One challenge is to reduce the current high share of unrated bonds, which prevents many investors that use credit ratings (sometimes as a binding requirement) in their asset allocation process from investing. It also limits the ability to gauge the overall risk of the market. Other challenges are the very low levels of liquidity and lack of pricing transparency. The applicable regulations with respect to pre‑ and post-trade transparency, which are provided in MiFIR/D II, allow for a large number of exceptions which has led to a decrease in transparency on the Swedish bond market.
Considering the findings in this study, the following issues may merit further research and regulatory attention:
1. The growing share of investment fund ownership. The share of outstanding bonds held by investment funds is higher than in peer countries. The domestic share of 43% is in addition to foreign ownership, which makes up 60% of total holdings, a substantial share of which is also likely to be investment funds. On the one hand, that has offered increased access to the corporate bond market, in particular for retail investors, and possibly increased access to market-based debt financing for companies. On the other, it could potentially adversely impact the stability of the market in the absence of proper liquidity management by funds, and clear regulatory guidance in this respect. Open-ended bond funds offer investors cash-like liquidity based on underlying portfolios that are composed of less liquid instruments. In times of crisis, as investors seek to redeem large amounts simultaneously, this can exacerbate downward price pressures on an already liquidity-constrained market. Investor heterogeneity could possibly be promoted through measures such as stronger bondholder protection, transparency, and material requirements, for instance including more developed rules on equal treatment of bondholders and specific regulation on the role of bond trustees, which may increase market trust among a broader group of investors.
2. Industry concentration and the exposure of real estate companies. Real estate companies have gone from representing a negligible share of the Swedish bond market to becoming very substantial, accounting for 48% of total issuance and 39% of outstanding amounts in 2021. The majority of bond market activity in the real estate sector is made up by a relatively small number of companies, and the industry is more concentrated than the broader market. That could potentially lead to market pressures, in particular in an environment of tightening monetary conditions and downward price pressure on real estate, i.e. the underlying asset.
3. The large share of unrated corporate bonds. Sweden has a relatively high share of unrated bonds. By having a credit rating, issuers build a reputation of being transparent, credible and reliable with respect to investors. It also expands the range of potential buyers, since many institutional investors and indices allocate capital based on credit ratings. Credit ratings also enable investors to better estimate and quantify the risk associated with a security. In addition, it may help regulators gauge overall market risk. Credit ratings from the large international rating agencies are costly, but there are alternatives of national low-cost systems for credit ratings, as exemplified in this report.
4. Lack of information about the security and the issuer available to potential investors during the issuance and placement process. Due to the use of exceptions in the EU prospectus regulation as well as local market practices, the amount of information available to investors in Sweden during the issuance process is limited. Improvements in this respect could be beneficial to attract a wider range of investors, for example through facilitating the comparison of the terms offered in different bond contracts.
5. Pricing transparency in the corporate bond market. Pricing transparency in the Swedish bond market is low under the applicable EU regulation. Despite self-regulatory efforts in Sweden to address this, transparency in pricing securities remains limited, hampering the price discovery process.
