SWEDEN: An Introduction to Capital Markets: Debt

Introduction 

The domestic debt capital market in Sweden recovered very well during 2021 after a 33% decline in new issue volume during 2020 as a result of COVID-19. During 2022, however, it has been marked by a general increase in uncertainty with downward pressure on secondary market prices and elevated risk premiums. This development is largely explained by sharply increased inflation and the corresponding responses of central banks as well as Russia’s war against Ukraine. As a consequence, the Swedish bond market’s volatility increased significantly during 2022 while, simultaneously, market liquidity has deteriorated. The Nordic corporate bond market has nevertheless proven to be a robust source of capital and has continued to function relatively well. At year end, the total outstanding volume in the Nordic corporate bond market was EUR116 billion, a decline of 8% compared to 2021.

Green, Social, Sustainable and Sustainability-Linked Bonds

In line with global trends, green, social, sustainable and sustainability-linked bonds (GSSS bonds) have become a substantial part of the Swedish debt capital market and we have in particular noticed an increase of sustainability-linked bonds (SLBs). In respect of the total Nordic sustainable bond issuance, the share of SLBs vis-à-vis traditional bonds has increased during 2022. Failure to meet pre-agreed target key performance indicators (KPIs) is typically linked to a penalty clause, most commonly resulting in a coupon step-up. It will be interesting to see whether the prevailing penalty clause model will evolve as investors’ expectations for real sustainability impact increase.

Even if KPIs and target-setting are scrutinised by a second-party opinion provider and assessed indirectly as a result of the marketability of the relevant SLB, we acknowledge that there are challenges with respect to poorly defined KPIs as well as the lack of a common market understanding of the level of robustness and ambitiousness in target-setting. In this regard, the proposed European green bond standard (EUGBS), which initiated inter-institutional negotiations in mid-2022, with the aim of, for example, aligning use of proceeds with requirements set out in the EU Taxonomy Regulation as well as third-party scrutiny of pre and post-issuance materials, could bring about an interesting alternative to the current industry standards.

The Effects of the War in Ukraine on the Swedish Debt Capital Market

The war in Ukraine has led to a situation of considerable market uncertainty and puts at risk the strong economic recovery that had been taking place in the wake of COVID-19. Higher inflation following the war has resulted in rapid and substantial policy rate increases by central banks; thereby directly affecting borrowing costs. As a result, activity in the Nordic bond market declined in 2022 compared to the historically strong 2021. However, we see that issuers and investors are now increasingly adjusting to the new market environment and meeting each other in terms of pricing At the start of 2023, higher activity levels were being seen once again in the Nordic bond market.

Rising inflation rates, tightened monetary policy and deteriorating macroeconomic conditions in general have also elevated refinancing risks for many issuers with maturing outstanding bonds. In the weaker debt capital markets many bond issuers have instead turned to bank financing or direct lending as alternatives to bond loans. However, banks and direct lenders will not be able, or willing, to take on all maturing bond debt and we therefore estimate that bond spreads will be elevated for some time to come. As a result, we note a trend among companies issuing debt instruments: they are seeking to secure the whole volume of the issued amount prior to the public launch of the transaction.

Due to the elevated refinancing risks facing many bond issuers we also, to a larger extent than before, see that issuers with maturing bond loans are seeking to extend the maturity date of their bond loans through amendment processes thereby avoiding having to raise new capital in a weaker market environment. We expect the trend of these so called “amend and extend” processes to continue during 2023.

Discussions are ongoing about implementing benchmark standards for the largest issuers of corporate bonds denominated in Swedish krona in order for these issuers to concentrate bond trading on a smaller number of bond loans. This would hopefully create better liquidity conditions for investors in the individual bond loans as well as lowering issuers’ financial risks and costs of borrowing.

Regulatory Updates 

While the Stockholm Interbank Offered Rate (STIBOR) remains an eligible benchmark and is almost exclusively used for Swedish kroner-denominated bonds, the Swedish central bank (Riksbanken) is encouraging the use of transaction-based reference rates rather than traditional interbank rates. To this effect it has begun the publication of the transaction-based overnight reference rate: SWESTR. The first bond with SWESTR as reference rate was issued by Swedish Export Credit Corporation in January 2023 and we expect it to be a growing trend. Meanwhile, the Swedish Financial Benchmark Facility has filed an application for STIBOR to be approved under the (EU) Benchmark Regulation based on a transaction-based methodology.

In August 2022, a new Swedish Reorganisation Act implementing the EU restructuring directive entered into force, providing Swedish companies facing economic difficulties with a US Chapter 11-like restructuring alternative. In contrast to the previous Swedish restructuring regime, which only enabled a cram-down of unsecured debt and therefore was rarely applied, the new regime involves all classes of creditors, including secured creditors, and enables additional measures such as debt-to-equity conversions. While providing more flexibility than the previous regime, it poses new risks to secured creditors.

General Market Updates Including Trends 

A global trend that is starting to gain traction in Sweden is the use of blockchain or distributed ledger technology (DLT) in the issuance and trading of securities (and most notably bonds). The use of DLT offers the potential to significantly increase efficiency and reduce administrative burdens in the issuance and trading processes. To date, there have been no issuances under Swedish law, but we are aware of Swedish actors participating in projects in other jurisdictions and/or contemplating projects under Swedish law. With the EU Pilot Regime for digital securities coming into force during the spring of 2023, we expect to see further development of this trend during 2023.

During 2022, Nasdaq Stockholm launched its new multilateral trading facility (MTF), Nasdaq Transfer Market, as a competitor to the Frankfurt Stock Exchange Open Market, which has been used historically by issuers on the Swedish corporate bond market for a quick and easy initial listing prior to a subsequent listing on the regulated market of Nasdaq Stockholm. The purpose of Nasdaq Transfer Market is to accommodate timely and temporary listings of bonds, provided that such bonds are scheduled for a listing on an EU-regulated market within 12 months of issuance. This provides an opportunity for issuers to temporarily list their bonds on an MTF without requirements for prospectus, or similar documentation, or to prepare and publish financial accounts in accordance with International Financial Reporting Standards (IFRS). We believe that Nasdaq Transfer Market will facilitate the issuance of bonds for smaller or newly founded companies which may not have the time and/or resources to meet the requirements for listing on an EU-regulated market.