When Swedish real estate company Vasakronan decided to venture outside the local bond market, it chose to issue in Australian dollars and go fully digital – a strategy that netted it new international long-term investors, as Kat Van Hoof reports.

Johan Fredriksson

Johan Fredriksson

The Nordics has provided fertile ground for innovation in investment banking circles, so it is no surprise that the first fully digitally issued bond was printed by the biggest property company in the region, Vasakronan. Jointly owned by the four Swedish National Pension Funds (AP1-4), it holds and manages 174 properties with the portfolio valued at SKr144bn ($15bn).

Vasakronan is no stranger to the bond market, having issued no fewer than 29 euro medium-term notes (EMTNs) since November 2018, according to the company's debt portfolio manager, Johan Fredriksson. “Historically, Vasakronan has funded itself in the Swedish market and occasionally in Norway,” he says. Late in 2018, Moody’s assigned an A3 rating – signifying an upper-medium grade with low credit risk – to the firm’s €6bn EMTN programme.

Aside from local currencies, Vasakronan has issued paper in euros, US dollars and yen in the past, but was looking to tap a new well of investors. “We looked to international investors to extend the maturity of the credit portfolio and to not be too dependent on the local market,” says Mr Fredriksson. 

Liabilities for a real estate company tend to be long-dated, but it is difficult to secure tenure beyond five years in the Swedish market, so Vasakronan hired Citigroup to help diversify the bonds portfolio.

Left-field choice

The decision was made to issue bonds in Australian dollars for the first time. This may seem like a left-field choice, but opened up a whole new range of potential investors. “The link to the Swedish national pension funds, combined with a strong credit rating, makes the bonds appealing to long-term fixed-income investors,” says Mr Fredriksson, who adds there is a lot of life savings and insurance money in Asia looking for this type of opportunity.

Vasakronan is established in Scandinavia, where the Swedish pension fund system is well understood, but it was necessary to engage closely with prospective investors. The company drummed up interest through investor presentations. “We received a lot of follow-up questions, which is quite normal from Asian investors, so they ended up thoroughly understanding our story and the investment case,”  says Mr Fredriksson.

Asian investors were further attracted by Vasakronan’s deep green status, he says; the company issued the world’s first green commercial paper in late 2018 to fund short-term expenses of environmentally friendly buildings in its portfolio. 

Digital journey

Alongside the desire to diversify the credit portfolio, Vasakronan has been on a quest to simplify transactions, while saving costs. “Vasakronan has a rather small finance department, but is very active on the bond markets, so we are trying to be as digital as we can to make processes more efficient,” says Mr Fredriksson. 

The company had worked with Origin Markets on previous trades, using its platform to sign documentation digitally as its process is similar to that used by local Swedish banks. “We wanted to try a fully digitised bond issuance, from beginning to end, which would make it much easier to adjust term sheets and the final terms documents if necessary,” says Mr Fredriksson. 

For a property company that mainly issues private placements of vanilla bonds, automation of the issuing process is relatively easy. Most of the documentation remains the same from one offering to the next because only some information, such as currency rates and dates, require updating.

No drama

In late June, Citi and Vasakronan launched an A$30m ($20.3m) bond offering with a 15-year tenor on Origin. “We were clear about the funding levels we wanted to meet in Swedish krona and Australian dollars, so pricing was relatively set from the start,” says Mr Fredriksson. The timing of the issuance mainly depended on swap levels, as Vasakronan’s pension fund owners must post their funding levels in Swedish krona and euro, limiting the possibilities for foreign exchange exposure.

The paper priced at Stockholm Interbank Offered Rate plus 110 basis points (bps) and Australian mid-swaps plus 144bps. “The trade was not a dramatic one. Vasakronan works with published funding levels and these were met,” says Mr Fredriksson. One undisclosed Asia-based investor swept up the entire A$30m offering.

Proceeds have been earmarked for Vasakronan’s most energy-efficient projects and general green funding needs. Mr Fredriksson is  pleased with the deal. “This type of fully digital bond is not for everyone, but for our needs as an issuer that knows the market very well, is looking for a smooth process and wants access to deeper markets, this is the way to go,” he says.

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