A Comparative Study: The Pricing Factors of High Yield Corporate Bond Issuances in Norway and Sweden

Cecilia Duan & Vaiga Rimsaite

Student thesis: Master thesis

Abstract

The main objective of this thesis is to assess the pricing dynamics in the primary market for the high yield corporate debt issued in Norway and Sweden. By focusing on yield spread at the time of issue, the study analyses how a selected set of company-specific, issue-specific and market-specific variables affect bond pricing by employing ordinary least squares regression modelling. An empirical, cross-sectional study based on a sample of 888 high yield corporate bonds is employed based on Stamdata information during a ten year time period between 2006 and 2016. The thesis only focuses on non-financial companies. On an overall level, the final model can explain 47,6% and 82,2% of variations in yield spreads for bonds issued in Norway and Sweden respectively. The total sample is further divided into subgroups by rating and maturity to better capture the behaviour of different segments. Three important findings from the models are to be presented.
Firstly, empirical results show that credit ratings alone explain a substantial part of explanatory power for spreads of bonds issued both in Norway and Sweden. However, the premium seems to be twice as material for the Swedish high yield market as for the Norwegian one when looking at company rating at the time of issue in isolation. This indicates that the relatively novel Swedish high yield market is more sensitive to debt offers of low-rated issuers and as a means to warrant the uncertainty of a purchase, investors require higher yields. On the other hand, Norwegian high yield market with its heavily-dependent oil and gas industry composition is concluded being also vulnerable to market dynamics and external shocks. This is reflected in notably more market-specific variables being significant in comparison to Sweden, where company- and issue-specific metrics are the primary determinants. Secondly, empirical results show that equity volatility is another common factor present in pricing of bonds both in Norway and Sweden. It has a higher marginal effect in the latter signifying that during the risk-off times, it is more expensive to issue debt in Sweden because investors are more sensitive to times of deteriorating market sentiment causing poor liquidity. Thus, investors may demand higher compensation for potentially higher transaction costs. Last but not least, the empirical analysis shows results that contradict theory but support findings of other academics. Consistent throughout all models, the output indicates that speculative grade bonds with shorter maturities tend to yield higher. This is somehow counterintuitive and possible explanations are provided in the analysis section.
As this thesis assesses the pricing factors of bonds at the time of issue, it serves as a contribution for non- financial companies that seek financing in the high yield corporate bond market.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2016
Number of pages162