Sweden’s Embattled Landlords Get Ray of Hope With Bond Sales

After a year and a half of being all but frozen out, Sweden’s embattled property companies are starting to issue bonds again in a tentative sign that a financing crunch is beginning to ease.

(Bloomberg) — After a year and a half of being all but frozen out, Sweden’s embattled property companies are starting to issue bonds again in a tentative sign that a financing crunch is beginning to ease.

Commercial landlords in the biggest Nordic nation haven’t sold bonds in any major volume for 18 months as soaring interest rates and declining property valuations put debt capital markets out of reach for all but the highest rated borrowers.

In the past week there have been new bond deals announced for several issuers in Sweden, including Castellum AB, Fabege AB, NP3 Fastigheter AB and Dios Fastigheter AB. Taken together, the new supply of mostly shorter-dated notes would total about 2.4 billion Swedish kronor ($216 million). 

The banker structuring new bond deals at one of Sweden’s big three lenders says the activity is an intentional response to developments on the bond market. 

“We’re encouraging BBB-rated borrowers to test the water, guided by the levels in the two-year bonds that have been issued recently,” said Svenska Handelsbanken AB’s head of bond origination, Anders Holmlund, in an interview. 

Read more: Bloomberg’s new issue monitor in Nordic currencies

Holmlund acknowledged that demand from bond investors is still tentative for the investment grade segment rated BBB and that it’s not yet clear whether recent issuances are the “beginning of a more long term trend.” For unrated companies or those with the junk ratings such as SBB, the uncertainties are even more acute.

The view of a new trend emerging is shared by another senior bond banker at Swedbank AB. “We believe this is a combination of better general sentiment, partly because many see that the interest rate peak could be near, and that these real estate companies are now generating a relatively good return,” Gustav Bjorck, head of syndicate, IG Origination and ESG DCM, said in emailed comments.

But it’s too early to say the sector is out of the woods completely. Bond volumes so far this year are down about 88% compared to the same period of 2021. And current levels wouldn’t come to close to bridging the funding gap.

Through 2025, Swedish landlords must rollover or find alternative ways to refinance about $27 billion of bond debt. With bond costs still too high, many such as Samhallsbyggnadsbolaget i Norden AB — as SBB is formally known — have resorted to asset sales while others such as Castellum have issued equity.

Read More: Castellum Plans $955 Million Share Sale to Shore Up Finances

Another Swedish borrower priced out of the bond market in recent months is Corem Property Group AB. The landlord sold 10 billion kronor ($903 million) of assets in the first half of the year to manage its liquidity needs and bring down debt. 

Having repaid a 850 million kronor bond earlier this week, Corem intends to continue bring down its volume of bonds as long as terms aren’t getting any better, according to Chief Executive Officer Rutger Arnhult. 

“We continue to sell assets and can cover all maturing bonds in 2023, and the disposals we are working with now are intended to cover maturities in 2024,” Arnhult said in an interview. “But we hope that the bond market will come back.” 

Like many others, Corem amassed a sizable bond stack during the years of ultra-low interest rates to expand its portfolio, but found itself with unsustainably high leverage when rates suddenly started rising. That’s symptomatic of the funding challenges facing a sector that’s seen underlying rates climb to 4% from zero at the start of 2022, making the cost of borrowing too high for many business models. 

While Corem’s CEO described last week’s new supply as “very positive” for the property sector and a sign that the market is “heading in the right direction,” it remains to be seen if the pickup in activity can be sustained.

“The next few days will be important,” Holmlund said. “The whole market would benefit from continued issuance in BBB real estate, not least if there would also be slightly longer tenors like three or even four to five years.” 

(Adding comments from Swedbank in 7th paragraph)

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