Frame of Reference
Within this chapter, previous research regarding the problem of this thesis will be pre-sented. Thereafter, to enable a deeper understanding from the reader, relevant theories will be described and explained.
The previous research presented here will give the reader an insight of the situation and problems on the Swedish corporate bond market that could be seen during 2011-2012. Also, other studies that could help explaining or motivating proposed improvements are presented. The main themes of the research are organized and summarized below.
”Den svenska företagsobligationsmarknaden – en förstudie”
This pre-study, written by Daniel Barr, was initiated by The Confederation of Swedish Enterprise, which is the largest and most influential business federation in Sweden, rep-resenting 60 000 company members (Svenskt Näringsliv, 2013). This study has been in-itiated to map out the Swedish corporate bond market, identify holdbacks and propose improvements for the market from the issuers’ perspective. The study is made through several interviews with market participants, authorities and academics with great exper-tise within the field of corporate bonds.
The author includes several propositions in the analysis that should be highlighted in the debate of enhancing the Swedish corporate bond market.
The first topic discussed is transparency. Barr (2011) believes that the corporate bond market should have the same terms of transparency as the government- and mortgage bond market. Furthermore, it is mentioned that according to the Swedish Financial Su-pervisory Authority (Finansinspektionen), which is authorized to manage transparency regulations, all bonds that are not traded on an exchange should have the same transpar-ency rules. However, in reality for corporate bonds, there is no insight at all and the au-thor states that the Swedish Financial Supervisory Authority breaks their own rules by passively disregard this development. The overall suggestion in this study, regarding transparency of corporate bond contracts, is that it has to be increased and that regulators, such as Swedish Financial Supervisory Authority, have to follow and apply their own legal framework.
The second topic Barr (2011) discusses is the importance of market care, which denotes actions to increase the liquidity and functionality of the market. There are multiple sug-gestions of actions that can be taken. One suggestion is to apply standardized bond con-ditions that new issuers should use as a benchmark. This would improve the matching of maturities and coupons, which could ease the pricing process and also enable arbi-trage- and derivative trading that in addition could increase liquidity. In the study, a partnership among the banks involved in this business is suggested. The partnership would create a firm that will function as a trustee for the bond holders and represent them in legal processes. This could ease the legal process when the issuer can not fulfill a bond contract and the ownership of a corporate bond loan is large and outspread.
A third topic in the study concerns potential investors’ lack of knowledge about this kind of investments. The author discusses the importance of increasing the knowledge about this market in a longer perspective. Investors and originators have to increase their competence in the field of credit analysis of corporate bonds and distribute anal-yses to new potential investors.
”Market for Swedish Non-Financial Corporations’ Loan-Based Fi-nancing”
This is a study written by Gudrun Gunnarsdottir and Sofia Lindh as part of the 2011’s edition of “Sveriges Riksbank Economic Review”, which is published by the Riksbank4 three times per year. The Economic review is a report that contains studies regarding topics relevant to their field of operation (Riksbanken, 2013:a). The study is mainly built on interviews with market participants and a questionnaire that was sent out to companies in March 2011.
In this study, Gunnarsdottir and Lindh (2011) discuss the 2011’s financing environment for corporations in Sweden and the future of the corporate bond market. Basel III and Solvency II’s potential impact on the corporate bond market and also whether there is a need for transparency regulations from the EU-commission are discussed. Furthermore, the study presents the market actors’ view of the corporate bond market that has been expressed in the interviews.
The authors discuss the impact from Basel III on the credit market. The regulations may have an impact on corporations directly with a decreased loan supply, higher borrowing rates and increased refinancing risk. An alternative development could be that banks’ shareholders accept a decreased profitability due to a decreased risk and therefore the banks will not pass on the fully cost to the customers.
Impacts from Solvency II are also discussed. The proposed changes could make it more expensive for insurance companies to hold low-rated corporate bonds with a grade be-low BBB. Therefore, high-yield corporations can choose not to obtain any grade at all, which would allow the big insurance companies to still invest in these high-yield corpo-rate bonds. Hence, the authors describe the Solvency II regulations to potentially cause an increase among investments in high-yield corporate bonds with no official grade.
The authors’ overall analysis is that a smaller supply of capital from banks may influ-ence companies to issue bonds, instead of taking traditional bank loans, to a higher ex-tent. Nevertheless, bank loans will still be the greatest financing source for corporations. The authors also experience that corporations were positive about the development in the corporate bond market, but they can detect some limitations in areas such as trans-parency and liquidity. The banks’ opinion is that bank loans still will be the cheapest fi-nancing alternative, however, the cost of bank loans may increase in the future mean-while cost of issuing bonds may decrease. The banks are preparing for this potential de-velopment by enhancing their units in the field of corporate bonds.
Gunnarsdottir and Lindh (2011) further explain that investors observe opportunities in this market, where less risk than equity is undertaken but still yields higher returns than government bonds. However, to interest more investors, the market has to become more liquid and transparent.
In the end of the study the authors, based on results from their research, present some initiatives that could be taken to develop the market. Increase transparency, standardiza-tion, establish trustee functions and lower the minimum capital amount of issuance are the major ones.
“An Anatomy of Corporate Bond Markets: Growing Pains and Knowledge Gains”
This study is done by Pipat Luengnaruemitchai and Li Lian Ong (2005) on behalf of the International Monetary Fund (IMF). The purpose of the study was to discuss key issues relating to the development of local corporate bond markets. In this section some of the-se issues will be summarized along with some examples from developing markets around the world.
Historically, the corporate borrowing has been narrowed to the banking sector in many countries. However, since the middle of the 1990s, the corporate bond markets have be-come a more important part of the credit market for the private sector. The reasons for this are many, but an important effect from the more developed corporate bond market is that the financial system gets more diversified, which some argue will lower the sys-tematic risk. It is, for example, argued that the recession in Japan during the 1990s would have been less severe if there existed a well-functioning corporate bond market.
Luengnaruemitchai and Ong (2005) explain that for a corporate bond market to develop with quality and become deep and liquid, it requires a set of key features that must exist. The development of the corporate bond market has been different across mature market countries in the world. In the U.S., corporate bonds have been an important financial source for a long time. In most other mature economies, such as Germany, the corporate bond market was nearly non-existent until 1990s. In contrast to the U.S., the credit mar-ket in Europe has historically been dominated by the banking sector. In the late 1990s, the European market started to develop and the big catalyst for this was policy changes along with the introduction of the euro. During the first year of the euro, the issuance on the corporate bond market more than doubled. Companies in Europe took the opportuni-ty to diversify their debt by accessing a larger pool of investors than just banks. The Eu-ropean market was before the introduction of the euro, dominated by AAA and AA bonds. However, almost 50 percent of the issuances in the first year of the euro held an A credit rating. Even further down on the rating scale there was a clear sign of devel-opment of an emerging high-yield bond market.
Table of Contents
2.1 Choice of Subject
2.2 The Research Approach
2.3 The Research Method
2.4The Data Collection
2.5 Method Critics
3 Frame of Reference
3.1 Previous Research
3.2 Theoretical Framework
3.3 Legal Framework
4.5 Independent Observer
4.6 Legal Counselor
4.7 Market Outlook and Forecasts
5.1 Recent Developments
5.2 Future Development
5.3 Exploitation of Opportunities
7 List of References
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The Development of the Swedish Corporate Bond Market A sustainable market with a potential of high future growth