The Nordic property market is among Europe’s biggest, but when it comes to funding it is also one of the most traditional. While the UK sector, for instance, relies primarily on unsecured bonds, bank loans are still the mainstay of Nordic debt stacks.
As listed property companies – particularly those in Sweden – become more financially sophisticated, they are turning to bonds. But their finance chiefs do not see the capital markets displacing loans as their main funding source any time soon. “The bond market is strong now but if that changes, and you need to refinance, it’s more difficult to do that with a bond than a bank with which you have a long-term relationship,” says Susann Linde, chief financial officer at Gothenburg-based property company Wallenstam.
They also value the loan market’s stability. Arvid Liepe, chief financial officer at Swedish property firm Wihlborgs Fastigheter, says: “To my mind, bonds are probably more volatile and higher risk. If the market moves into a crisis-like situation,
the bond market is more likely to be closed than the bank market.”
Motivating by pricing
A key reason that larger operators have issued bonds is pricing. With regional interest rates at record lows, it is cheaper for them to sell an unsecured bond than borrow from the banks, which invariably require collateral. Yet banks can be the most cost-effective option for smaller and lower rated firms, for whom bond prices can fluctuate dramatically.
A typical loan to the sector has a tenor up to five years, is at a floating rate and, as of recent years, has an interest rate floor of zero. The floor has proved problematic in countries with negative rates, such as Sweden, because hedging contracts are not floored. This has led to a perverse outcome whereby firms today have higher interest costs than if the Stockholm Interbank Offered
Rate (Stibor) were zero.
“I understand the banks don’t want to end up in a situation where they pay the borrower, but a Stibor floor is illogical in that they don’t exist in the interest rate swap market,” says Mr Liepe. “Between the floor and Stibor being negative, we end up paying in both legs of the swaps.”
There are recent examples of banks agreeing to remove Stibor floors, but lenders’ ability to compete on price is restricted by other obligations. “In part, it’s because of the equity ratios and return requirements the banks have to their stakeholders,” says Dag Fjeldstad, client manager of real estate and construction in DNB’s large corporates segment. “There is a limit as to how low banks are willing to go with margin, even for the best of credits.”
Bank appetite for Nordic property exposure has varied over time, but both borrowers and banks see no shortage at present. “We don’t see access to credit as an obstacle,” says Mr Liepe.
Volumes have been muted, but the borrower mix has changed thanks to the capital markets rush. “Lately, it seems that some of the larger companies issuing bonds rather than loans has increased the availability of bank financing for smaller companies,” says Swedbank credit analyst Michael Johansson.
Mr Fjeldstad concurs, adding: “We see this as a desirable development. It’s part of our policy to assist the smaller, non-investment grade companies that may not be able to tap into the capital markets.”
Lending has traditionally been on a bilateral basis, but bankers say this is evolving. “Lately, there has been an increasing tendency towards club deals or syndicated deals, particularly for the larger facilities. Those deals tend to be with other Nordic banks,” says Olav Løvstad, head of real estate and construction in DNB’s large corporates segment.
Firms with properties in Denmark benefit greatly from the Danish mortgage system, which recognises commercial property as eligible collateral for covered bonds. They can borrow from the country’s mortgage institutions at bond market rates for tenors of up to 30 years. n