Corporate Bonds - An Emerging Source of Financing for Swedish Real Estate Companies

Sammanfattning: Banks have become increasingly restrictive in their lending towards commercial real estate, a development that is expected to increase due to new regulations. This has caused Swedish companies, amongst them several real estate companies, to obtain financing through the capital markets. The main focus of this paper is corporate bonds, and those Swedish real estate companies that have issued bonds. We distinguish between government owned and other real estate companies, as their creditworthiness differ considerably. The research is based upon interviews with people in the industry as well as pre-existing secondary data.   The Swedish bond market is underdeveloped as Swedish companies traditionally obtain debt through bank loans. Until a few years ago, only government owned real estate companies had issued bonds; although since 2010, several real estate companies without government ownership have issued unsecured bonds, this as availability of bank loans has decreased due to new regulations. Increased bank funding costs and increased bank loan margins has further caused prices of bank loans to rise. Swedish banks are increasingly reluctant to finance higher LTV-levels, and loans are conditioned with an increasing number of covenants. Issues of corporate bonds provides the benefit of funding diversification – decreasing overall financial risk; and allows for higher LTVs as financing on top of bank loans. In order for corporate bonds to be an alternative to bank loans, secured bonds would have to be issued. However, there is some uncertainty regarding how such bonds would be priced. We have investigated the yield-determinants of bonds issued by real estate companies, as well as the motives for real estate companies to issue bonds. Investors perceive corporate bonds as an increasingly attractive investment compared to other asset classes, fuelling a development towards increased bond issues amongst real estate companies.