How real estate companies refinance their maturing bonds during rising interest rates. A focus on Nordic-listed real estate investment companies

Abstract

The Nordic bond market has witnessed a substantial expansion in recent years, primarily attributed to the extensive central bank intervention. However, the landscape changed dramatically following the outbreak of the COVID-19 crisis and geopolitical tensions, resulting in a surge in inflation rates. In response, central banks tightened the monetary policy by raising interest rates, which sharply increased in a short period of time, making financing more expensive and, therefore, less accessible. Industries heavily reliant on debt, including the real estate sector, were particularly impacted by the elevated cost of financing.

In particular, bond financing, which used to be a cheap source of financing for investment-grade companies, has become significantly more expensive than bank loans. As a result, companies with approaching bond maturities are under pressure to refinance their obligations. Due to the unsustainable bond pricing, these companies are actively exploring alternative solutions to secure the necessary liquidity.

In order to gain a comprehensive understanding of the current situation surrounding refinancing solutions amidst periods of tight credit, this study interviews eight listed real estate investment companies from Finland and Sweden, along with five experts in the banking sector. By engaging with these industry stakeholders, this research aims to shed light on the current situation and explore potential refinancing strategies. The findings of this thesis indicate that as far as banks are not forced to limit their credit, companies will mostly refinance their bonds through bank loans due to the major cost-effectiveness of the latter. However, the refinancing decisions are highly dependent on each firm’s financing strategy and current debt structure. This study also provides alternative refinancing solutions and highlights the importance of an investment-grade rating in enhancing flexibility and mitigating potential risks.