Credit Where Credit's Due: An Empirical Study of Defaults in the Swedish Corporate Bond Market Between 2004 and 2023

Sammanfattning: This paper studies the relationship between bond defaults and yield spread, and other bond and company variables observable at issuance using a comprehensive dataset of matured and defaulted bonds from non-financial Swedish firms, covering the period 2004-2023. We find that higher yield spreads are correlated with higher default probabilities, particularly in the high-yield (HY) bond segment. More specifically, we find that a one percentage point increase in yield spread increases the probability of default with 0.8 and 2.2 percent for the full sample and the HY sample, respectively. Moreover, the effect on default probabilities increases non-linearly with higher yield spreads. Other notable variables we find as strong predictors of bond default are fixed rate bonds, time to maturity, if the bond is issued in NOK or USD, dividend payout ratio, and company age. Surprisingly, however, we do not find accounting ratios to be strong predictors of bond default.