Executive summary
Since the financial crisis, the Swedish corporate bond market has grown significantly in size and changed in character. The number of issuers has increased manifold and, in parallel, the size of both issues and issuers have decreased substantially. This report provides an extensive mapping of the market, illustrating its transformation over time with respect to market size, issuer characteristics (notably the broadening to include smaller issuers), credit risk, liquidity and market structure. It also includes an international comparison. Drawing from these empirical findings as well as interviews with key institutions and market participants, the report offers a set of policy recommendations (relating to both regulatory and self-regulatory measures) to improve the functioning of the Swedish corporate bond market, with a particular focus on the new issuer profile.
Chapter 1 contains an assessment of the market and the related policy recommendations; Chapter 2 provides a mapping of the Swedish market and its developments; and Chapter 3 compares key aspects of the Swedish market with other markets in the Nordics and the EU, as well as in selected non-EU countries.
The recommendations are split into seven different areas:
Disclosure at issuance. Under Swedish market practice, a bond offer is typically fully subscribed before a prospectus is published. Investors instead make their decisions based on information contained in a form of investment memorandum, a mostly unregulated and non-standardised document. Market participants have highlighted cases where the investment memorandum omits material information included in the subsequent prospectus, as well as cases of contradictory information between the two documents. In addition, investors have also noted that the time they are given to review the terms of an offer can be unduly short.
Recommendation: Develop self-regulation to ensure that essential information included in the formal prospectus is also included in the investment memorandum. Establish a default review period of circa 10 days, accommodating well-motivated deviations.
Comparability of bond terms. Market participants have indicated that there is significant heterogeneity with respect to the bond terms.
Recommendation: Consider the establishment of a non-normative template of standard bond terms developed by a self-regulatory body, where deviations from the template would need to be disclosed following a comply or explain model.
Equal treatment of bondholders. There is no national regulation that defines the meaning of equal treatment in the context of bondholders. Market participants have indicated that the understanding of what constitutes equal treatment differs among practitioners.
Recommendation: Develop the legal requirement of equal treatment of bondholders. A possible model would be the self-regulatory approach used in the equity markets, where a principle set in law is complemented by self-regulation.
Ongoing disclosure. There is no established understanding of what constitutes inside information for bond issuers according to the EU Market Abuse Regulation (MAR). This may limit transparency and investor protection, especially where issuers only have bonds and no equities listed.
Recommendation: To simplify the application of MAR, consider methods to promote disclosure of inside information by corporate bond issuers.
The role of the agent. As opposed to many other countries, Sweden currently does not have any specific regulation on the role and duties of agents (which act as representatives of bondholders).
Recommendation: Consider the introduction of specific regulation on the role and duties of agents.
Credit ratings. A significant share of Swedish corporate bonds lacks a credit rating. This may limit inflows of institutional investor capital and restrict the ability of regulators and market participants to gauge broader market credit risk.
Recommendation: While positive that investors are not over-dependent on credit ratings, consider if incentives to obtain credit ratings should be increased, in particular for smaller issuers.
Price transparency and secondary market liquidity. Many investors consider price transparency to be inadequate and, as in many other markets, liquidity in the Swedish secondary market is low. This contributes to higher costs of capital for companies through liquidity premia and may exacerbate fire sale pressures during sharp market downturns.
Recommendation: Consider efforts to improve price transparency, benefitting from EU-level developments (notably the MiFIR review). Consider whether issuance of bonds structured in line with the Swedish regulatory authorities’ proposed benchmark standard could be encouraged, with due consideration to the possible effects it may have on corporate refinancing risks. In addition, several other recommendations outlined in this report, notably with respect to disclosure and credit ratings, are also expected to contribute to improved liquidity.
Significant growth in corporate bond financing. The Swedish corporate bond market for non-financial companies has grown significantly over the past two decades, notably after the 2008 financial crisis. This is partly in response to stricter international banking regulation and efforts to reduce the reliance on bank financing. The average annual amount raised through bonds by Swedish non-financial companies in the period from 2009 to 2023 was more than twice that of the pre-crisis period from 2000 to 2008. By the end of 2023, the total outstanding amount of non-financial corporate bonds was USD 80 billion, almost double the amount at the end of 2008. The share of bond financing in total debt financing has grown faster in Sweden than in peer countries, and is today higher than the euro area average but lower than in the United Kingdom and United States.
Expansion of the market to smaller firms. Until 2008, the Swedish corporate bond market was dominated by a small number of large and established companies within a limited number of industries. However, over the past decade and a half, the share of issuance made up by new issuers has increased significantly, with a simultaneous decrease in the median issue and issuer size. Between 2000 and 2010, the average share of first-time issuers was 23%, which grew to 35% between 2011 and 2023. The median issue size fell from a peak of USD 708 million in 2009 to USD 71 million in 2023. This is a much more significant broadening of the market than can be seen in Nordic peer countries. These developments are indicative of increased accessibility and broader use of corporate bond markets among smaller Swedish companies. This has effectively resulted in a two-tier market, split between very large, internationally active companies, and smaller local companies.
A decrease in credit quality. In parallel to the growth of the market, and in line with global trends, credit quality has continuously decreased in the Swedish market since 2000, and more notably since 2009. This is partly because the non-investment grade segment has grown, from 7% of total outstanding amounts in 2009 to 12% in 2023. However, it is also an effect of decreasing credit quality within the larger investment grade segment. Between 2009 and 2023, the lowest investment grade rating, BBB, represented 53% of average annual investment grade issuance, compared to 11% between 2000 and 2008.
A high share of unrated bonds. The Swedish market has a high share of unrated bonds. Of the total number of issues between 2000 and 2023, 47% did not have a rating from one of the three major international rating agencies or the main local rating agency. This is in line with the other Nordic countries but substantially higher than for example France, the Netherlands and the United States.
Industry concentration and real estate exposure. Real estate companies have gone from representing a negligible share of the Swedish bond market to accounting for as much as 37% of outstanding amounts in 2023, making it the largest industry using the non-financial corporate bond market. A relatively small, but increasing, number of companies represent the majority of bond issuance in the real estate sector. This could potentially lead to market pressures in an environment of tightening monetary conditions and downward price pressure on real estate assets.
A changing ownership landscape. The share of corporate bonds held by domestic pension funds and insurance companies is slightly higher in Sweden than the euro area average, where these investors’ shares vary widely from 8% in Germany to 72% in the Netherlands. Direct retail participation in the market is highly limited. Foreign investors are larger owners of Swedish non-financial corporate bonds than domestic ones, holding 63% of total outstanding amounts at the end of the second quarter of 2023. A key recent ownership trend is the growth of investment funds as holders of corporate bonds. At the end of the second quarter of 2023, they represented 37% of domestic ownership, compared to less than 5% in 2008. On the one hand, that has offered increased access to the corporate bond market, in particular for retail investors, and possibly also 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.
Limited liquidity and price transparency. Swedish authorities have highlighted low liquidity and limited price transparency as structural issues in the market. The applicable regulations with respect to pre- and post-trade transparency, which are provided in MiFIR/D II, allow for a large number of waivers which has led to a decrease in transparency in the Swedish market. A domestic recommendation has since been implemented to improve transparency, which initial survey results suggest has been helpful. At the EU level, there is political agreement on the review of MiFIR, notably for the establishment of an EU-wide consolidated tape which includes post-trade disclosure of bond transactions. Swedish authorities have proposed the introduction of a benchmark standard for corporate bonds as a possible way to improve liquidity and market functioning. Between 2005-2023, 67% of total issuance by amounts (and 23% by number) fulfilled the proposed benchmark criteria. That figure could have been as high as 90%, using an estimate of bonds that did not conform to the proposed standard but that were issued by companies that could conceivably have issued conforming bonds.
Signs of market pro-cyclicality. Dynamics during the COVID-19 pandemic suggested procyclical tendencies and a lack of resilience under stress in the Swedish corporate bond market, counter to the benefits a well-functioning capital market should be expected to provide. 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.