## SWEDEN'S CORPORATE VULNERABILITIES: A FOCUS ON COMMERCIAL REAL ESTATE

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**Canonical URL:** [SWEDEN'S CORPORATE VULNERABILITIES: A FOCUS ON COMMERCIAL REAL ESTATE](https://www.imf.org/-/media/files/publications/cr/2023/english/1sweea2023002.pdf)

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### Overview
- CRE debt constitutes a large portion of corporate debt and is highly bank-dependent.
- Net debt-to-net operating income grew from a ratio of around 10 to 15 between 2009 and 2021.
- Loans to CRE firms represent between 10 and 25 percent of banks’ private sector lending.
- Non-bank debt now represents close to half of total outstanding bond market issuance.
- Foreign holdings of CRE firms’ bonds stand at 53 percent; among domestic investors, investment funds hold around 21 percent of CRE bonds.
- Average loan duration is about 3.5 years, and bond maturity is about 5 years.
- Office vacancy rates rose from about 3 percent in 2019 to close to 8 percent in 2021 in Stockholm, with similar trends in Gothenburg and Malmö.
- The CRE market experienced sizeable price rises in 2015–21 alongside increased leverage.

### Vulnerabilities and Contagion Risks
- Funding structure and size of the CRE sector create substantial spillover risks to the financial system and real economy.
- Amplification mechanisms identified:
  - CRE firms may draw on bank contingent credit lines; CRE firms have just under SEK 190 billion in contingent credit lines with banks, which is enough to sustain funding for 2 years.
  - Liquidity premia on funding costs can undermine CRE profits and increase credit risk premia, turning liquidity shocks into solvency shocks.
  - Asset liquidations could lower property values sector-wide, triggering fire-sale prices and worsening borrowing conditions where real estate is used as collateral.
  - High concentration and cross-ownership among CRE firms (market is highly concentrated with 12 ultimate owners) can propagate shocks quickly across firms.
  - Redemption requests and deterioration in CRE performance can reduce liquidity, boost funding costs, and impair broader securities prices.
  - Hits on bank capital from provisioning charges and/or outright losses could crowd out credit to the economy.
- Market structure specifics:
  - Cross-ownership and consolidation through joint ventures have increased, with some firms revaluing properties without significant changes in earning capacity.
  - Investor composition risk: 53 percent foreign holders and 21 percent investment funds among domestic holders exposes the sector to rapid selloffs in times of global risk aversion.

### Stress Test
- Historical and supervisory analyses:
  - Riksbank (2017) analysis of 100 largest Swedish-owned CRE companies valued at around 40 percent of GDP suggested tangible effects on banks from CRE shocks.
  - FI stress tests (2020, 2021) showed elevated refinancing risks when spreads increased and vulnerabilities for firms with bank loans under certain scenarios.
- Staff assessment and data samples:
  - Orbis database used; stress tests conducted on a sample where the largest 100 companies hold aggregate assets of around 70 percent of GDP and debt of around 50 percent.
  - A broader sample of about 3,800 firms with total assets amounting to US$482 billion (90 percent of GDP) and aggregate indebtedness of US$ 363 billon (70 percent of GDP) was referenced.
  - Key metric: Interest Coverage Ratio (ICR = EBIT/Interest Expense). An ICR of less than 1 implies inability to service debt; an ICR threshold of 1.5 times was applied as an early warning signal.
- Stress scenario design and shocks:
  - Shocks reflecting the FSAP adverse scenario were applied.
  - Most pronounced impacts came from: increase in advanced country policy rates up to 400 basis points for the Swedish repo rate; and a 38 percent decline in both residential and commercial real estate prices after two years.
- Stress scenario impacts:
  - Joint occurrence of shocks significantly weakened ICRs: median ICRs fell below 1.5 in the adverse scenario and below 1 in a more severe scenario.
  - Debt-at-risk was found to fluctuate between 20–35 percent.
  - Medium and large-size firms were affected similarly.

### Policy Considerations (from Section 1)
- Improve disclosure:
  - Supervisory authorities and potentially the Securities Market Association should encourage better disclosure in bond issuance templates, including liabilities (especially foreign currency liabilities) and contingency plans for funding dry-ups.
  - Better disclosure would help distinguish more solvent from less solvent firms and reduce contagion.
- Enhance data collection:
  - Further improve comprehensiveness and periodicity of CRE data (e.g., rents, vacancies, transaction prices) and integrate multisource data into a single database.
- Improve corporate bond market liquidity:
  - Introduction of benchmark bonds to increase standardization and reduce price impact of distressed sales, improving market efficiency and demand.
- Examine bank contingent credit line drawdowns:
  - FI should adjust solvency stress tests or apply supervisory intelligence to examine bank impacts if all contingent credit lines were drawn down in a short period; stress the drawdown first and then subject that portfolio to subsequent stress.
- Reassess bank capital requirements for CRE exposures:
  - Based on FSAP micro-prudential stress tests, concentration, structural issues, and feedback loops suggest that bank capital is insufficient.
  - FI should take a flexible approach to consider where in the capital stock to add additional capital or apply a more intensive supervisory approach, if EU legislation permits.
- Prepare crisis intervention plans:
  - Authorities should plan interventions designed to limit moral hazard, restore market functioning, incentivize participants to re-enter markets, and ensure transparency.
  - Any scheme should ensure equity holders can recapitalize but be wiped out if insolvent; bond holders should take losses (for example by write-downs or equity conversions).

### CRE sector monitoring and intervention targeting (Section 2)
- Interventions should be targeted to where the negative links to the real economy might be strongest.
- Monitoring of the CRE sector is hampered by data issues (Fitch December 2022, Sweden full rating report).

### Key financial ratios and firm-level metrics (figures referenced)
- Figures presented include:
  - Median ROA (In percent) by sample, large firms, and small firms (2015–2020).
  - Median ROE (In percent) by sample, large firms, and small firms (2015–2020).
  - Median Interest Coverage Ratio (In percent) by sample, large firms, and small firms (2015–2020).
  - Median Total Debt/Total Equity (In percent) by sample, large firms, and small firms (2015–2020).
  - Median Net Debt/EBIT by firm size (2015–2020).
- Firm-size composition reported:
  - Large Firms: 32%
  - Medium-size Firms: 57%
  - Small Firms: 10%

### CRE stress-test scenarios and outcomes (Section 2 figures)
- Stress-test scenarios presented as Sc 1, Sc 2, Sc 3 and compared with sample/median across years 2015–2020.
- Metrics reported under scenarios:
  - Median Interest Coverage Ratio (ICR) under each scenario.
  - Median Net Debt to EBIT under each scenario.
  - Impact on Debt at Risk (Percent of total debt) under each scenario.
  - Impact on Firms at Risk (Percent of total firms) under each scenario.
  - Debt at Risk by Firm Size (US$ Million) for Scenario 1, Scenario 2, Scenario 3, and 2020 baseline.
  - Debt at Risk by Firm Size (Percent of total debt at risk) across scenarios.
- ICR band categories used in the figures and stress results:
  - 2 < ICR < 3
  - 1 < ICR < 2
  - ICR < 1
  - Debt-at-Risk defined at ICR < 1.5 (label shown: "Debt-at-Risk (ICR<1.5)")
- Visual results illustrate increasing shares of debt-at-risk and firms-at-risk across Scenarios 1 → 2 → 3, with breakdowns by firm size (Large, Medium-Size, Small).

### Policy implications and priorities (Section 2)
- Prioritize targeted interventions in segments of the CRE sector where contagion or negative links to the real economy are strongest.
- Improve data collection and availability on the CRE sector to enhance monitoring and stress-testing capabilities.

*Source: IMF staff, "SWEDEN: Selected Issues", Section 1 (completed February 24, 2023); 1sweea2023002 - Section 2 (figures and text as presented in the source PDF).*

### Section 1

### SWEDEN'S CORPORATE VULNERABILITIES: A FOCUS ON COMMERCIAL REAL ESTATE

### Overview
- CRE debt constitutes a large portion of corporate debt and is highly bank-dependent.
- Net debt-to-net operating income grew from a ratio of around 10 to 15 between 2009 and 2021.
- Loans to CRE firms represent between 10 and 25 percent of banks’ private sector lending.
- Non-bank debt now represents close to half of total outstanding bond market issuance.
- Foreign holdings of CRE firms’ bonds stand at 53 percent; among domestic investors, investment funds hold around 21 percent of CRE bonds.
- Average loan duration is about 3.5 years, and bond maturity is about 5 years.
- Office vacancy rates rose from about 3 percent in 2019 to close to 8 percent in 2021 in Stockholm, with similar trends in Gothenburg and Malmö.
- The CRE market experienced sizeable price rises in 2015–21 alongside increased leverage (see figures referenced in source).

### Vulnerabilities and Contagion Risks
- Funding structure and size of the CRE sector create substantial spillover risks to the financial system and real economy.
- Amplification mechanisms identified:
  - CRE firms may draw on bank contingent credit lines; CRE firms have just under SEK 190 billion in contingent credit lines with banks, which is enough to sustain funding for 2 years.
  - Liquidity premia on funding costs can undermine CRE profits and increase credit risk premia, turning liquidity shocks into solvency shocks.
  - Asset liquidations could lower property values sector-wide, triggering fire-sale prices and worsening borrowing conditions where real estate is used as collateral.
  - High concentration and cross-ownership among CRE firms (market is highly concentrated with 12 ultimate owners) can propagate shocks quickly across firms.
  - Redemption requests and deterioration in CRE performance can reduce liquidity, boost funding costs, and impair broader securities prices.
  - Hits on bank capital from provisioning charges and/or outright losses could crowd out credit to the economy.
- Market structure specifics:
  - Cross-ownership and consolidation through joint ventures have increased, with some firms revaluing properties without significant changes in earning capacity.
  - Investor behavior risk: foreign and domestic investor composition (53 percent foreign, 21 percent investment funds) exposes the sector to rapid selloffs in times of global risk aversion.

### Stress Test
- Historical and supervisory analyses:
  - Riksbank (2017) analysis of 100 largest Swedish-owned CRE companies valued at around 40 percent of GDP suggested tangible effects on banks from CRE shocks.
  - FI stress tests (2020, 2021) showed elevated refinancing risks when spreads increased and vulnerabilities for firms with bank loans under certain scenarios.
- Staff assessment:
  - Orbis database used; stress tests conducted on a sample where the largest 100 companies hold aggregate assets of around 70 percent of GDP and debt of around 50 percent.
  - A broader sample of about 3,800 firms with total assets amounting to US$482 billion (90 percent of GDP) and aggregate indebtedness of US$ 363 billon (70 percent of GDP) was referenced.
  - Key metric: Interest Coverage Ratio (ICR = EBIT/Interest Expense). An ICR of less than 1 implies inability to service debt; an ICR threshold of 1.5 times was applied as an early warning signal.
- Stress scenario impacts:
  - Shocks reflecting the FSAP adverse scenario were applied (noting the most pronounced impacts came from: increase in advanced country policy rates up to 400 basis points for the Swedish repo rate; and a 38 percent decline in both residential and commercial real estate prices after two years).
  - Joint occurrence of shocks significantly weakened ICRs: median ICRs fell below 1.5 in the adverse scenario and below 1 in a more severe scenario.
  - Debt-at-risk was found to fluctuate between 20–35 percent.
  - Medium and large-size firms were affected similarly.

### Policy Considerations
- Improve disclosure:
  - Supervisory authorities and potentially the Securities Market Association should encourage better disclosure in bond issuance templates, including liabilities (especially foreign currency liabilities) and contingency plans for funding dry-ups.
  - Better disclosure would help distinguish more solvent from less solvent firms and reduce contagion.
- Enhance data collection:
  - Further improve comprehensiveness and periodicity of CRE data (e.g., rents, vacancies, transaction prices) and integrate multisource data into a single database.
- Improve corporate bond market liquidity:
  - Introduction of benchmark bonds to increase standardization and reduce price impact of distressed sales, improving market efficiency and demand.
- Examine bank contingent credit line drawdowns:
  - FI should adjust solvency stress tests or apply supervisory intelligence to examine bank impacts if all contingent credit lines were drawn down in a short period; stress the drawdown first and then subject that portfolio to subsequent stress.
- Reassess bank capital requirements for CRE exposures:
  - Based on FSAP micro-prudential stress tests, concentration, structural issues, and feedback loops suggest that bank capital is insufficient.
  - FI should take a flexible approach to consider where in the capital stock to add additional capital or apply a more intensive supervisory approach, if EU legislation permits.
- Prepare crisis intervention plans:
  - Authorities should plan interventions designed to limit moral hazard, restore market functioning, incentivize participants to re-enter markets, and ensure transparency.
  - Any scheme should ensure equity holders can recapitalize but be wiped out if insolvent; bond holders should take losses (for example by write-downs or equity conversions).

*Source: IMF staff, "SWEDEN: Selected Issues", Section 1 (completed February 24, 2023).*

### Section 2

### 1sweea2023002 - Section 2

### CRE sector monitoring and intervention targeting
- Interventions should be targeted to where the negative links to the real economy might be strongest.
- Monitoring of the CRE sector is hampered by data issues (Fitch December 2022, Sweden full rating report).
- References cited in the source include: a Riksbank study on corporate bond market functioning; Finansinspektionen stability report 2021; and "Managing Systemic Banking Crises: New Lessons and Lessons Relearned (imf.org)."

### Key financial ratios and firm-level metrics (figures presented)
- Figures presented in the section include:
  - Median ROA (In percent) by sample, large firms, and small firms (2015–2020).
  - Median ROE (In percent) by sample, large firms, and small firms (2015–2020).
  - Median Interest Coverage Ratio (In percent) by sample, large firms, and small firms (2015–2020).
  - Median Total Debt/Total Equity (In percent) by sample, large firms, and small firms (2015–2020).
  - Median Net Debt/EBIT by firm size (2015–2020).
- Firm-size composition reported in the figure:
  - Large Firms: 32%
  - Medium-size Firms: 57%
  - Small Firms: 10%

### CRE stress-test scenarios and outcomes
- Stress-test scenarios presented as Sc 1, Sc 2, Sc 3 and compared with sample/median across years 2015–2020.
- Metrics reported under scenarios:
  - Median Interest Coverage Ratio (ICR) under each scenario.
  - Median Net Debt to EBIT under each scenario.
  - Impact on Debt at Risk (Percent of total debt) under each scenario.
  - Impact on Firms at Risk (Percent of total firms) under each scenario.
  - Debt at Risk by Firm Size (US$ Million) for Scenario 1, Scenario 2, Scenario 3, and 2020 baseline.
  - Debt at Risk by Firm Size (Percent of total debt at risk) across scenarios.
- ICR band categories used in the figures and stress results:
  - 2 < ICR < 3
  - 1 < ICR < 2
  - ICR < 1
  - Debt-at-Risk defined at ICR < 1.5 (label shown: "Debt-at-Risk (ICR<1.5)")
- Visual results illustrate increasing shares of debt-at-risk and firms-at-risk across Scenarios 1 → 2 → 3, with breakdowns by firm size (Large, Medium-Size, Small).

### Policy implications and priorities
- Prioritize targeted interventions in segments of the CRE sector where contagion or negative links to the real economy are strongest.
- Improve data collection and availability on the CRE sector to enhance monitoring and stress-testing capabilities.

*Source: 1sweea2023002 - Section 2 (figures and text as presented in the source PDF).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1sweea2023002.pdf_