The future of Danish Corporate Bonds

Abstract

In light of the financial crisis there has been much debate as to the future usage of corporate bonds in Denmark. This attention should be attributed to a number of the largest Danish non-financial companies issuing corporate bonds in the aftermath of the crisis. The objective of this thesis is to determine the future development of corporate bonds in Denmark. This has been accomplished by answering three sub questions, which each examine central issues attached to the main question of the thesis. The thesis identifies that the current favourable conditions for corporate bonds, in which stable forecasted inflation and higher debt seniority than e.g. equities are characteristics, which are greatly appreciated by investors today due to uncertainty about the sustainability of the global economic recovery. Nonetheless, should the main refinancing rate in EU once again rise from the current historically low 1%, ultimately increasing the cost of borrowing, corporate bonds will become less attractive to issuers. Bank and mortgage financing in Denmark have, from when the crisis began in 2008, to 2010, experienced an aggregate contraction in lending to non-financial companies of 4%, where bank lending represented an 18% decline, and mortgage lending increased 14%, due to increased debt seniority. This should be attributed to the current negative growth outlook for the Danish economy, where Denmark has experienced a 3,4% decrease in GDP, in 2008-2010, which in turn deters corporations in undertaking large investments, thereby decreasing demand for lending. This implies that a more positive economic outlook would lead to an increase in overall lending. The research undertaken in the thesis clarifies that the future for corporate bonds in Denmark by non-financial companies will continue to represent a modest proposition of debt financing. There is no concrete evidence that the financial sector has experienced a disintermediation process as a consequence of the financial crisis, which is confirmed by the fact that the sector continues to represent the vast majority of newly issued corporate bonds. Although some Danish non-financial companies, e.g. Maersk, have issued corporate bonds after 2008 in an attempt to reduce dependence towards financial institutions, this cannot, as of today, be seen as a general shift in debt financing policy. Bank and mortgage financing are expected to continue to be, by far, the most demanded source of debt financing by non-financial companies in Denmark. This must be attributed to the fact that accessing the capital markets directly, demands a relatively large amount of long-term debt financing needs, which the majority of Danish non-financial companies do not require, in that the size of Danish non-financial companies is relatively limited.