The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Amanda Åström Ericsson, Amelia Wall, Axel Mårtensson, Henrik Marklund, Jonathan Dauksz, Oscar Örnmark Department of Technology Management and Economics Division of Entrepreneurship and Strategy CHALMERS UNIVERSITY OF TECHNOLOGY Gothenburg, Sweden 2017 Bachelor’s Thesis Project TEKX04-17-27 [THIS PAGE IS INTENTIONALLY LEFT BLANK] BACHELOR’S THESIS 2017:27 The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case by Amanda Åström Ericsson Amelia Wall Axel Mårtensson Henrik Marklund Jonathan Dauksz Oscar Örnmark Department of Technology Management and Economics Division of Entrepreneurship and Strategy CHALMERS UNIVERSITY OF TECHNOLOGY Gothenburg, Sweden 2017 The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Authors: Amanda Åström Ericsson, Amelia Wall, Axel Mårtensson, Henrik Marklund, Jonathan Dauksz, Oscar Örnmark @ Authors, 2017 Supervisor: Marouane Bousfiha, Department of Technology Management and Economics Examiner: Erik Bohlin, Department of Technology Management and Economics Bachelor’s Thesis 2017:27 Department of Technology Management and Economics Division of Entrepreneurship and Strategy Chalmers University of Technology SE-412 96 Gothenburg Telephone +46 31 772 1000 Gothenburg, Sweden 2017 ABSTRACT Background In 2014, the Riksbank adopted a zero interest rate policy (ZIRP), and in 2015 a negative interest rate policy (NIRP). This unparalleled situation, with an extremely low rate has sparked a heated debate amongst economists as well as laymen. Notably, there is a growing concern that the low interest rates may cause bubbles in industries where price levels are not really captured by the CPI. Moreover, there is a lack of research on how these low interest rates affect corporate financing decisions and economic sustainability. The research on how capital structures is affected by the repo rate is only in its infancy. Aim This thesis aims to investigate how the Riksbank’s monetary policy during the last five years has affected companies’ financial strategies, regarding debt and capital structure, and risk- taking. In particular, the study will look at how practitioners at investment banks and investment firms and academics reason regarding the effects of ZIRP and NIRP. The thesis also encompasses an analysis of the current monetary policy's impact on economic sustainability. Methodology The thesis is an explorative study and the methodology is primarily qualitative. It is based on semi structured interviews with investment bankers, investment managers and academics. These interviews are then complemented with secondary data on repo rates, firm solvency and more. The analysis is abductive in that it moves between the perspectives of the interviewees, the data and theory. Literature review Monetary policy, its effects on market interest rates and yield requirements are discussed first. Furthermore, the dominant theories on capital structure are covered: trade-off theory and pecking order theory. Next, the most common types of private debt are discussed. The review ends with an introduction to economic sustainability and financial bubbles. Conclusion The study gives support to the assumption that ZIRP and NIRP has in fact affected corporate financing decisions, regarding capital structure and debt composition. Firm size is hypothesised to be a moderator of the relationship between capital structure and repo rate. Moreover, the interviews conducted for this thesis support several of the hypotheses put forth in the Master’s thesis of Severin and Rademark (2006). For instance, interest rate is a major factor to consider when taking on debt. By diminishing the cost of debt and increasing corporate risk-taking, ZIRP and NIRP have contributed to an increase in systemic risk. Being an explorative study, the conclusion is presented in the form of eight new hypotheses. [THIS PAGE IS INTENTIONALLY LEFT BLANK] ACKNOWLEDGEMENTS This Bachelor’s Thesis was conducted during the spring of 2017 at Chalmers University of Technology, at the department of Technology Management and Economics, division of Entrepreneurship and Strategy. The thesis’ aim was to investigate how the monetary policy in Sweden during the last five years has affected corporate financing decisions. We would like to thank Maxine Rior, Erik Mårtensson and Wiveca Swarting at Danske Bank; Kristoffer Svensson and Adam Lidén at Nordea, and Rickard Talling at Swedbank, for their valuable insights and perspectives on the subject. Furthermore, we would like to thank the investment firm interviewees for contributing with their expertise, and finally Taylan Mavruk, Christian Sandström and Jan Jörnmark, for their contribution to the study. We especially want to thank our supervisor, Marouane Bousfiha, for his valuable feedback, guidance and support throughout the entire process. Finally, we would like to thank all of our family and friends, who in several ways contributed to the writing of this thesis. Chalmers University of Technology Göteborg May 12, 2017 Amanda Åström Ericsson Amelia Wall Axel Mårtensson Henrik Marklund Jonathan Dauksz Oscar Örnmark [THIS PAGE IS INTENTIONALLY LEFT BLANK] TABLE OF CONTENTS Abstract ................................................................................................................................................................... 3 Background ......................................................................................................................................................... 3 Aim ..................................................................................................................................................................... 3 Methodology ....................................................................................................................................................... 3 Literature review ................................................................................................................................................. 3 Conclusion .......................................................................................................................................................... 3 Acknowledgements ................................................................................................................................................. 5 Table of contents ..................................................................................................................................................... 7 1 Introduction .................................................................................................................................................... 1 1.1 Aim ........................................................................................................................................................ 2 1.2 Research questions ................................................................................................................................ 3 1.3 Delimitation ........................................................................................................................................... 3 1.4 Report outline ........................................................................................................................................ 4 2 Method ........................................................................................................................................................... 5 2.1 Literature study ...................................................................................................................................... 5 2.2 Empirical study ...................................................................................................................................... 5 2.2.1 Interview study ............................................................................................................................. 6 2.2.2 Secondary data .............................................................................................................................. 7 2.3 Discussion about validity ....................................................................................................................... 8 3 Literature review ............................................................................................................................................ 9 3.1 Monetary policy and its consequences .................................................................................................. 9 3.1.1 CPI as a determinant of monetary policy .....................................................................................10 3.1.2 Repo rate’s effect on market interest rates ...................................................................................10 3.1.3 Repo rate’s effect on required yield .............................................................................................11 3.1.4 ZIRP and NIRP ............................................................................................................................11 3.1.5 Hypothesised effects on solvency ................................................................................................12 3.2 Optimal capital structure ......................................................................................................................12 3.2.1 Equity ...........................................................................................................................................12 3.2.2 Why use debt as leverage? ...........................................................................................................13 3.2.3 Modigliani-Miller Theorem .........................................................................................................13 3.2.4 Trade-off theory ...........................................................................................................................14 3.2.5 Pecking order theory ....................................................................................................................14 3.3 Debt composition ..................................................................................................................................15 3.3.1 Common types of private debt .....................................................................................................15 3.3.2 Corporate bonds ...........................................................................................................................17 3.3.3 Bond market vs stock market .......................................................................................................17 3.4 Economic sustainability ........................................................................................................................18 3.4.1 Interest rates and (un)sustainability .............................................................................................18 3.5 Additional literature ..............................................................................................................................19 4 Result.............................................................................................................................................................21 4.1 Trends during the last decade ...............................................................................................................21 4.1.1 Inflation and repo rate ..................................................................................................................21 4.1.2 Capital structure ...........................................................................................................................22 4.1.3 Bank lending ................................................................................................................................23 4.1.4 Bank regulations ..........................................................................................................................24 4.2 Academics view of the present economic environment........................................................................25 4.3 Practitioner perspectives on ZIRP and NIRP .......................................................................................26 4.3.1 The investment bank perspective .................................................................................................26 4.3.2 The investment firm perspective ..................................................................................................28 5 Analysis .........................................................................................................................................................32 5.1 How have companies’ financing decisions been affected by ZIRP and NIRP? ...................................32 5.1.1 Is there a credit expansion? ..........................................................................................................32 5.1.2 What has happened to debt composition? ....................................................................................34 5.1.3 What has happened to capital structure? ......................................................................................36 5.1.4 How does practitioners’ reasoning fit with theory? .....................................................................39 5.2 How are ZIRP and NIRP affecting economic sustainability? ...............................................................41 5.2.1 Is the Swedish monetary policy expansionary? ...........................................................................41 5.2.2 Does Sweden really have a low repo rate?...................................................................................42 5.2.3 Is the Consumer Price Index relevant in a time of digitalization and globalisation? ...................43 5.2.4 Is the inflation target valid? .........................................................................................................43 5.2.5 Is NIRP sustainable? ....................................................................................................................45 6 Discussion .....................................................................................................................................................47 7 Conclusion .....................................................................................................................................................50 8 References .....................................................................................................................................................52 9 References for charts and figures ..................................................................................................................58 Appendix A - Description of the people that partook in the study Appendix B - Interview questions Markets Appendix C - Interview questions corporate and Leveraged Finance Appendix D - Interview questions Investment Firms Appendix E - Interview questions Academics Appendix F – Solvency data Appendix G – Riksbank repo rate Appendix H - NASDAQ Stockholm Solvency Large-cap Appendix I - NASDAQ Stockholm Solvency Medium-cap Appendix J - NASDAQ Stockholm Small-cap Appendix K - Solvency First North Appendix L - Calculations TABLE OF FIGUERS Figure 3.1. Schematic diagram of monetary policy (Fregert and Jonung, 2014) Reworked based on Fregert and Jonung. Author’s own copyright. ...................................................................................................... 9 Figure 3.2 The transmission mechanism from repo rate to market rates (Own copyright) ............................... 11 Figure 3.3 Trade-off theory – debt benefits and costs. Author's own copyright. .............................................. 14 Figure 3.4 Pecking order theory. Author's own copyright ................................................................................ 14 Figure 3.5 A schematic description of the relation between diverse types of deb ............................................ 16 Figure 3.6 Relation between interest rates and bond prices. Author's own copyright. ..................................... 17 Figure 4.1 Historical CPI inflation. (Statistics Sweden, n.d.a). Author's own copyright. ................................. 21 Figure 4.2 Riksbank’s repo rate in a ten-year interval. (Riksbanken, n.d.f). Author's own copyright. ............. 22 Figure 4.3 Solvency for Swedish listed companies over time. (Appendix H-K). Author's own copyright. ...... 22 Figure 4.4 Lending in Sweden for both Banks and MFI. (Statistics Sweden, n.d.c). Author's own copyright. 23 Figure 4.5 M1. Money supply in Sweden (Statistics Sweden, n.d.d). Author's own copyright. ....................... 24 Figure 5.1 Average multiple of debt-to-EBITDA in LBOs on both the European and US market. (MacArthur, H., Haas, D., Varma. S, Elton, G., 2017). Adapted with permission. .............................................. 33 Figure 5.2 Average multiple of EBITDA in acquisitions (US market). (MacArthur et al., 2017). Adapted with permission. ...................................................................................................................................... 33 Figure 5.3 The types of debt that has become more common are covenant-light. Author's own copyright. .... 35 Figure 5.4 Solvency for Swedish listed companies over time. (Appendix H-K). Author's own copyright. ...... 36 Figure 5.5 Small Cap Solvency (equity / total assets). (Appendix J). Author's own copyright. ....................... 37 TABLE OF CHARTS Chart 2.1 List of interviewed persons. ............................................................................................................... 7 Chart 3.1 Most preferred method to estimate the risk-free rate in Sweden between 2013 and 2017 (Source: Walberg, J, 2017) ............................................................................................................................ 11 Chart 3.2 Different types of debt. Author's own copyright. ............................................................................ 16 Chart 3.3 Summary of additional literature used. Author's own copyright. .................................................... 20 Chart 5.1 Correlation Riksbank’s repo rate and solvency. (Appendix G). Author's own copyright................ 38 Chart 5.2 Capital structure hypotheses (Severin and Rademark, 2006) .......................................................... 39 Chart 7.1 List of hypotheses. ........................................................................................................................... 50 [THIS PAGE IS INTENTIONALLY LEFT BLANK] WORD LIST Boom - A boom refers to a period where certain stocks or product prices spiral upwards in an uncontrollable fashion. During a boom, output and market investments are increased. (Investopedia, n.d.a). Consumer Price Index (CPI) - Consumer price index is a price measurement for an amount of services and goods in a country which can be used when estimating the inflation in the country (Financial Times, n.d). Covenant - Covenant relates to an agreement of demands set by the creditor to a debtor. This is made to protect the creditor from financial repercussions by making the debtor fulfil certain conditions or prohibit certain actions. If the covenant is broken, the loan may for instance be declared default, or penalties could be applied. The demands are often set revolving KPIs and a sustainable business model which the debtor should practice (Investopedia, n.d.b). Deflation - In contrary to inflation, deflation decreases money supply, which in turn leads to an increased value of the currency (Investopedia, n.d.c). EBITDA - This KPI stands for: Earnings Before Interests, Tax, Depreciation and Amortization. It is commonly used to indicate the company's ability to service debt. Often used in combination with a multiple to valuate a company before acquisition (Investopedia, n.d.d). External investors - In this thesis, external investors include: angel investors, venture capitals, private equity firms and institutional investors or corporate investors. The difference between these investors range from exit strategies, amount of capital and maturity of the company being funded. The resulting difference is first and foremost the involvement each investor presents. Finansinspektionen (FI) - Finansinspektionen, also known as FI, is an authority in Sweden whose duty is to supervise and support the efficiency and stability of the financial system (FI, n.d). Investment Firms - A company with the main objective to buy and sell shares in companies. Through their ownership, they develop these companies over time. The size of companies referred to as investment firms ranges from small venture capital firms to publicly traded “control companies”. IPO - An initial public offering (IPO) is a first-time sale of a company’s stock on the public stock market. When going public, every individual, institution or investor will have the opportunity to invest in the company. Thus, the company will be obligated to have a portion of its shares available for purchase to the public, regularly it is a third of the shares that are being sold on the financial market (Welch, 2009). Key Performance Indicators (KPI) - These are sets of measurable variables which contains information on the performance of the company. The most common KPIs revolve around profit margin and revenue (Investopedia, n.d.e). LBO - A leveraged buyout (LBO) is when the acquisition of a company is mainly financed with debt. LBO is a method to acquire a company without having a great amount of equity. The method is often used when acquiring small or medium firms, or divisions of larger enterprises (Gaughan, 2007). MBO – A management buyout (MBO) is a type of leverage buyout. It is a business purchasing strategy that professional managers could execute to become the new owners of a company instead of employees. The professional managers simply do a buyout of a specific activity/division within a company which have potential for becoming an entirely separate business (Gaughan, 2007). M&A - M&A is a collective term for merges and acquisitions, hence the name M&A. A merge can be defined as two companies allowing an integration in-between them, a so-called fusion or merge. An acquisition is however when a company is purchased by another company, i.e. acquired (Welch, 2009). ROI - Return of Investment, is a performance measure which rates the investment contrary other possible paths of investments. ROI is used to consider profit against the capital invested (Investopedia, n.d.f). R&D - R&D, also known as research and development, is way of producing knowledge within companies and a strategy for growth (Gaughan, 2007). Solvency - This measurement is used to gain information of given companies’ ability to meet long-term financial obligations (Investopedia, n.d.g). [THIS PAGE IS INTENTIONALLY LEFT BLANK] The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 1 1 INTRODUCTION The Swedish central bank, the Riksbank, was founded in 1668 (Riksbanken, n.d.a). This makes it the first and oldest central bank in the world, after which several other countries quickly modelled their own central banks. The founding of the Riksbank marked the beginning of a now centuries old debate concerning the role of central banks in the economy and society at large. By the Riksbank’s account, the primary purpose as a central bank is to maintain price stability in the country by using the repo rate to influence the rate of inflation (Riksbanken, n.d.b). Manipulating the repo rate affects the money supply into the financial system, which is intimately linked to price levels, and thus inflation. Another important and very much related function the Riksbank occupies, is that it has the sole responsibility for manufacturing and providing the market with currency. Nonetheless, there are diverging views on what the role of a central bank should be. Concern for the dangers of inflation has varied greatly over time amongst scholars and public intellectuals. It is quite plausible this difference of opinion on inflation, that lies at the root of many1 of the disagreements around central banking. The concern for inflation partly stems from its relation to unemployment, as evidence emerged in the 1950s that there is a negative correlation between inflation and unemployment (Fregert and Jonung, 2014). This relation is known as the Phillip’s Curve2, and displays the trade-off between those factors. According to the view among central bankers and monetary economists, a rise in unemployment leads to a fall in inflation, which cannot be explained by price adjustment (Mankiw, 2011). However, some contemporaries of Phillips, such as Nobel laureate Milton Friedman, argued that it is only in the short run monetary policy affects this relation, and that in the long run there is no real correlation between inflation and unemployment (Ball, 2009). He would further argue in a Hayekian fashion, that a high inflation rate distorts the economy and ultimately hinders economic growth. However, many economists today argue that a too low rate of inflation also can be detrimental to economic growth. Therefore, many central banks, including the Riksbank, have set up an inflation target, usually around 2%. This inflation rate is considered to be the sweet spot between the two extremes. From 2012 and onwards, the rate of inflation in Sweden has been well below the Riksbank’s target rate of 2%, at times even negative (Statistics Sweden, n.d.a). This is indicative of a deflationary climate. The Riksbank has therefore been pushed to pursue a monetary policy with unprecedented rates, by applying a negative repo rate. This unparalleled situation, combined with a low inflation rate, has sparked a heated debate amongst economists as well as laypeople. 1 But is clearly not the only factor. Several other perspectives are appropriate in understanding the debate on monetary policy: Public Choice; libertarian versus more statist ideologies; behavioral economics etc. 2 Named after economist William Phillips who reported much of the historical data showing the relationship. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 2 Notably, there is a growing concern that this low repo rate may cause bubbles in industries where price levels are not really captured by the Consumer Price Index (CPI)3. It is argued, for instance, that the low rate pushes house prices upwards along with household leverage, resulting in a fragile and a not-so-sustainable situation (Riksbanken, 2016). However, the zero and negative interest rate policies, also called ZIRP and NIRP, have in some cases resulted in significant benefits for companies (Fransson and Tysklind, 2016). For instance, financing M&A activities, investing in R&D and issuing IPOs, is more easily pursued and very favourable because of the current monetary policy. Moreover, as economist Paul Diggle points out, Sweden has had more growth in the banking sector than the rest of the eurozone despite, or perhaps because of, the negative repo rate (2016). All this has led to a distinguished interest in analysing how companies’ willingness to borrow, take on risk and invest are affected by the negative repo rate. This concern is not surprising, considering that many economists view the adequate functioning of companies’ investment patterns, and risk-taking, the primary engines of a well-functioning economy (Goetzmann et al, 2015). One important aspect to analyse, is how the monetary policy has affected the balance between the two basic methods applied when funding M&A activities and investments: taking on debt or issuing equity (i.e. stocks). In other words, how has the capital structure been influenced by ZIRP and NIRP? Almlöf, Hafdell and Fröding (2016) studied this question quantitatively for the period up until 2014. They investigated the relationship between capital structure and the Swedish repo rate. They encouraged other researchers to extend upon their work by: • increasing the scope and looking at smaller companies; • perform a qualitative study to understand how practitioners reason about interest rates, and the Riksbank’s repo rate. By the same token, Severin and Rademark (2006) studied how Chief Financial Officers reason about capital structure. The authors postulate that the major theories on capital structure do not explain the actual reasoning of practitioners. Their Master’s thesis concludes with a set of hypotheses about capital structure for future researchers to explore. 1.1 Aim This thesis aims to investigate how the Riksbanks’s monetary policy during the last five years has affected companies’ financial strategies, regarding debt and capital structure, and risk- taking. In particular, the study will look at how practitioners at investment banks and investment firms and academics reason regarding the effects of ZIRP and NIRP. The thesis also encompasses an analysis of the current monetary policy's impact on economic sustainability. 3 This is further elaborated in section 3.1.1. CPI as a determinant of monetary policy. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 3 By consulting the available research literature on the topic and conducting interviews with parties with experience in financial markets, the ambition is to present a nuanced and measured picture of the low repo rate’s effect on companies' investments. Theory, as well as the attitudes and thoughts of relevant investment bankers and investment managers, will be considered and compared. Hopefully, this study will contribute to a new understanding of what impact ZIRP and NIRP has had on the financial world; voicing a new way forward in the current debate on monetary policy. The present thesis aims to expand upon the Bachelor’s thesis of Almlöf, Hafdell and Fröding’s (2016) by taking a qualitative approach. Furthermore, since the study has a more exploratory character, it studies not only capital structure, but also debt composition and economic sustainability. Moreover, the thesis also builds on the hypotheses on capital structure put forth by Severin and Rademark (2006). The conclusion of the report will be a set of hypotheses, for other researchers to further investigate. Two research questions will guide the formulation of these hypotheses, which will be presented in the following section. 1.2 Research questions As described above, this thesis sets out to answer the following question: How has the Riksbank’s monetary policy over the last five years affected Swedish companies’ attitude and investment strategies? This specific scope was chosen due to the change in repo rate from positive to negative. Furthermore, the main objective has been broken down into two research questions: i. How have companies’ financing decisions been affected by ZIRP and NIRP? a. Is there a credit expansion? b. What has happened to debt composition? c. What has happened to capital structure? d. How does practitioners’ reasoning fit with theory? ii. How has the low repo rate affected economic sustainability? a. Is the Swedish monetary policy expansionary? b. Does Sweden really have a low repo rate? c. Is the inflation target valid? d. Is NIRP sustainable? 1.3 Delimitation The study has been limited by a few factors, due to the sheer scope of information on the topic and the complexity of the issue. The study is limited by: • Time frame: past 10 years. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 4 • Geographic location: Sweden. • Study objects: mainly investment banks, investment firms and listed companies (instead of e.g. individuals). • Choice of interview objects: practitioners at investment banks, investment firms and academics. • Choice and quantity of research literature covered: primarily limited by project time allocated to reading. • Structure and quantity of interviews: primarily limited by project time. The potential drawbacks of these delimitations are many and some obvious. The benefits are on the other hand immense, as these delimitations makes a thorough analysis of the issue at hand possible. Rather than covering a too wide of an area, rigor and depth is pursued. Furthermore, the object of the study is limited by geographic location, considering first and foremost the country of Sweden. The choice of literature was determined by the research questions, as well as by guidance from experts in the field. The quantity of readings was limited by the time allocated in the project for research. 1.4 Report outline To address the aim, the study has been divided into seven chapters. • Chapter 1: An introduction to the subject of the thesis. • Chapter 2: The research methodology: interview study and literature study and the underlying reasoning for these. • Chapter 3: A review of the literature necessary for understanding the effects of monetary policy on corporate financing. The chapter deals with monetary policy, optimal capital structure, debt composition and economic sustainability. • Chapter 4: A brief historical overview of key measures over the last 10 years and a summary of the results of the interview study. • Chapter 5: The results are analysed and different perspectives contrasted to each other and discussed in light of the literature review. The result of this analysis is a series of hypotheses. • Chapter 6: A wider discussion on the effects of the current situation. • Chapter 7: Lastly, there is an ending conclusion. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 5 2 METHOD In the social sciences, there is a tendency for research designs to move from an exploratory, to a descriptive, to a causal design (Wallen, 1996). There is a straightforward rationale for this shift: when an area of investigation is young, there are many unknown complexities. Attempts at causal explanations, like those made in the natural sciences, are futile. Often, it is not even clear what the relevant questions to ask are. The exploratory design of this study is therefore well supported. The report is based on interviews with representatives from investment banks, investment firms and academics supplemented by a literature study. The literature study was used to guide the construction, conduction and interpretation of the interviews. The choice of method is partly inspired by Genelov et al (2015), whose Bachelor’s thesis ended up as a merging of a literature study and an interview study, analysing the effects of automation. In contrast to their work, the focal point of this study is on the interview study rather than the literature study. 2.1 Literature study The study began by surveying a selection of available literature on central banks in general. Moving forward, focus shifted to Sweden. The purpose was to learn what the contemporary views on central banking are, and specifically how these views apply to the Swedish situation. The study drew from methodologies used in software engineering by having two-week literature sprints4. The choice of literature included both books and research articles. When longer books were chosen, they were read over more than one sprint. By consulting researchers in fields relevant to monetary policy, finding quality sources took less work. Furthermore, by choosing literature based on specific questions, a narrower set of articles and books were obtained. 2.2 Empirical study Empirics was gathered primarily via interviews, as a cost-effective way of learning about the underlying thoughts of individuals. This is an especially suitable means of investigation when the goal is to acquire a deeper understanding of an issue (Blomkvist and Hallin, 2015, p. 76). Furthermore, interviews make stumbling upon new research ideas or good modifications of the current one more likely. Quantitative data (e.g. data on companies’ capital structure) complemented the interviews and were used to analyse the veracity of practitioners’ responses. 4 Primarily popularised by the introduction of the popular Scrum methodology in recent years. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 6 2.2.1 Interview study The interviews were semi structured, providing the benefits of high reusability between interviews whilst still preserving a degree of flexibility. Whenever possible, interviews were recorded and summarised but no manual transcription was made. Moreover, the interviews were conducted in pairs, which enabled one person to guide the conversation whilst the other one was taking notes. Severin and Rademark (2006) interviewed Chief Financial Officers (CFO) to analyse their reasoning on capital structure and how “practice fits with theory”. By interviewing practitioners in investment banks and investment firms, this study builds upon their hypotheses. The rationale for interviewing investment banks is threefold: 1. Investment banks advise companies in their investment decisions. By interviewing some of the major Swedish investment banks, this study indirectly gauges the sentiment of many companies; 2. Moreover, they are quite likely to influence investments in terms of capital structure, debt composition and economic sustainability; 3. The repo rate has a direct effect on banks’ interest rates (see chapter 3). These interest rates, in turn, affect company borrowing. The rationale for interviewing investment firms is threefold: 1. Investment firms’ primary focus is investments. By interviewing investment firms, it is possible to identify what drives investment decisions. 2. They can give a response to how the reallocation of capital is affecting the economy; 3. Like banks, they are in direct contact with many companies (e.g. their own portfolio companies). The same type of arguments as for banks hold. Also, eight academics were emailed and asked for an interview, but five of them declined. Thus, three academics have been interviewed to give their perspective on ZIRP and NIRP, and the economic sustainability of these. Selection criteria of bank interview objects: • Work at a major Swedish investment bank; • Work directly with M&As, IPOs and/or risk management; • Have most clients within industrial companies or PE-firms; • Experience from working in financial and capital markets. Selection criteria of investment firm interview objects: • Work at a major Swedish investment firm; • Work directly with M&As, IPOs and/or risk management; • Diverse set of portfolio companies (companies in at least three different sectors). The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 7 Below is the full list of people interviewed during the study: Chart 2.1: List of interviewed objects. A summary of the participants and their relevance in this study is presented in Appendix A. The questions used in the interviews can be found in Appendix B-E. Individual Position Reason for inclusion Maxine Rior at Danske Bank Bank perspective Erik Mårtensson at Danske Bank Bank perspective Wiveca Swarting at Danske Bank Bank perspective Kristoffer Svensson at Nordea Bank perspective Adam Lidén at Nordea Bank perspective Rickard Talling at Swedbank Bank perspective Alpha (anonymous)5 Investment firm A Investment firm perspective Bravo (anonymous)5 Investment firm B Investment firm perspective Charlie (anonymous)5 Investment firm C Investment firm perspective Taylan Mavruk Researcher at Gothenburg University Academic perspective Christian Sandström Researcher at Chalmers University Academic perspective Jan Jörnmark Economic historian Academic perspective 2.2.2 Secondary data Secondary data from financial reports, bookkeeping and annual reports has been gathered. Solvency data for companies listed on the NASDAQ Stockholm as well as First North was collected via Börsdata.se. The average of solvency was calculated for each year. Solvency data for a total of 498 companies was gathered. These were compiled into a spreadsheet from which solvency averages were computed. See Appendix H through K for the complete dataset. Inflation rates, monetary supply, repo rate and measures of bank lending were gathered from Statistics Sweden and the Riksbank. Calculations The weighted average of repo rate for each year since 2006 was calculated (see appendix G). This enabled the linear correlation between solvency and repo rate for the last 10 years to be calculated. The purposes of calculating the correlations were: • to complement the graphs of solvency versus repo rate. By checking the correlation, it is easier not to be misled by the graphs; • to expand upon the Bachelor’s thesis of Almlöf, Hafdell and Fröding (2016) who did a correlational study capital structure and repo rate. However, the sample size in this study is small and the correlations should not be viewed as robust. Moreover, there is no obvious reason for why the relationship should be linear. The formula for Pearson’s r, which is a common correlation coefficient, was used when calculating the correlation (Ahlgren, Jarneving and Rousseau, 2003). The MATLAB command corrcoef was used to calculate the correlations. 5 Why the investment managers choose to be anonymous is presented in Appendix A. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 8 2.3 Discussion about validity The opinions of the interviewees are not necessarily representative of the broader banker and investment firm population. Therefore, our findings are not automatically generalisable. This is the rationale for writing the conclusion in the form of a set of hypotheses. Moreover, no interviews were made with personnel at non-financial institutions apart from the interviewees at the investment firms. For instance, how CFOs reason about the repo rate’s effect on capital structure could differ from how investment bankers reason. This study tries to address this gap, by discussing the findings in the context of previous research. For instance, previous researchers have interviewed CFOs about capital structure (Severin and Rademark, 2006). Their findings are discussed in the analysis section and compared to the findings of this study. There is also a risk that the interviewees have interpreted questions differently. Economic sustainability, for example, does not a have a clear-cut definition. Thus, there is some risk that differences in viewpoint between the interviewees are a result of them “answering different questions”, rather than them having real differences of opinion. Given the human tendency for biased thinking, it is very likely that individual accounts of what is happening to the economy are more shaped by cognitive heuristics, such as representativeness and availability, rather than on a strict assessment of data (see e.g. Kahneman, 2003). Considering the topic at hand is highly uncertain and politicised, one can expect cognitive biases to be especially pronounced. This includes the biases of the authors themselves. On the other hand, perhaps this qualitative approach is needed in an early phase, to enable other researchers to navigate these seemingly uncharted waters, and eventually perform more quantitative and data driven research. To avoid the pitfalls of these biases, all authors of this study have been involved in all parts of the thesis. This way, the authors’ viewpoint diversity worked as a counterbalance to the menace of confirmation bias6. This concludes the review of the methods used to compile this thesis. Next, chapter 3 Literature review surveys the theories that form the basis of understanding for interpreting the results of the interviews and calculations. 6 Confirmation bias is the tendency for people to interpret information in ways confirming their own beliefs. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 9 3 LITERATURE REVIEW In this chapter, the literature relevant to this study's research questions is reviewed. Theory on monetary policy, capital structure and debt composition is covered. Also, research on economic sustainability and financial bubbles is presented. The chapter ends with an introduction to the literature used to interpret the gathered data in chapter 5 Analysis. The following sub-chapters are included: • Monetary policy and its consequences; • Optimal capital structure; • Debt composition; • Economic sustainability; • Other literature. 3.1 Monetary policy and its consequences The Riksbank aims to maintain price stability by influencing the money supply. This is called monetary policy and affects the inflation rate in order to reach the inflation target. The inflation target in Sweden is set to 2% (Riksbanken, n.d.b). The repo rate is the Riksbank’s primary instrument for affecting inflation rate. The interest rate is applied to banks when borrowing from the Riksbank, or depositing capital (see figure 3.1). Expectations of, and de facto changes of the repo rate, drive market rates (Riksbanken, n.d.c). Figure 3.1: Schematic diagram of monetary policy. It is a stylised case when the inflation forecast is below the target of 2% (Fregert and Jonung, 2014) Reworked based on Fregert and Jonung. Author’s own copyright. The degree of expected change of repo rate shifts aggregate demand. Important to note is that a change in monetary policy has a delay of one to two years before effects on market interest rates become visible (Riksbanken, n.d.c). This is a significant reason why monetary policy is Inflation forecast The forecasted CPI inflation, based on e.g. business cycles Repo rate If the inflation forecast is below 2% the repo rate will be lowered. Market interest rate, exchange rate This lower market interest rates. Aggregate demand Lowering rates leads to increased aggregate demand and vice-versa. Inflation The increased aggregate demand increases the inflation rate. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 10 based on forecasts concerning growth and inflation. A paper from Uppsala University called Why has inflation deviated from target? A Swedish Phillips Curve by Johan Grip (2014) even goes so far as to say that the intended effects of lowering interest rates could be delayed up to eight years. This drawn-out delay is due to the construction of the private loan market in Sweden. The paper also states that in the immediate and short term, the inflation rate goes down because of lowered interest rates. Another method to influence money supply is quantitative easing. This method is first and foremost used when the possibility to lower the repo rate is no longer an option. When central banks utilise quantitative easing, they increase the supply of money by purchasing government bonds (Investopedia, n.d.h). The Swedish economist Knut Wicksell (1936) argued that business cycles are a result of deviations from the natural rate of interest. Wicksell defines the natural rate of interest as an interest level compatible with a stable price level. In short, he argues that a monetary policy that keeps interest rates above the natural rate contracts the economic activity and leads to lower prices. The opposite effect is consequently obtained when the interest rate is below the natural rate. 3.1.1 CPI as a determinant of monetary policy Changes in Consumer Price Index (CPI) is a common measure of inflation in Sweden. It measures changes in price level of a so-called “basket of consumer goods and services” The purpose of CPI is to indicate changes in household costs. Therefore, CPI is an important variable when considering the Riksbank’s monetary policy. However, since price increases of individual parts may skewer CPI, there is a need to estimate the underlying inflation. This is done by excluding price shifts on individual goods in CPI. One such measure is CPIF - which stands for CPI with fixed interest rates (Riksbanken, n.d.d). CPI inflation depends on exchange rates and international prices, i.e. international capital flow. Hence, these are important to consider when deciding upon monetary policy. A rapid growth in value of the Swedish currency, the Krona, dampens import prices and decreases demand of Swedish goods, which results in a decrease in exports. Moreover, an increase in international prices contributes to a rising inflation in Sweden (Casas, 1977). 3.1.2 Repo rate’s effect on market interest rates Banks’ profitability depends partly on the margin between their own interest rates and the Riksbank’s lending rate. Therefore, as banks seek to maximise their profits, the Riksbank’s repo rate has a direct effect on banks’ lending rates. Stockholm Interbank Offered Rate (STIBOR) is the average of rates the so called STIBOR- banks7 offer each other. STIBOR is used as a reference rate for banks when determining their 7 All the major Swedish banks. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 11 interest rates to companies (Riksbanken, n.d.e). Consequently, STIBOR is an influential factor to consider when trying to understand how companies and their choice between different types of funding are affected by the repo rate (see figure 3.2). Figure 3.2: The transmission mechanism from repo rate to market rates. Author's own copyright. 3.1.3 Repo rate’s effect on required yield Capital Asset Pricing Model, or CAPM, is one of the most common methods used to estimate the required yield on equity. It can also be used to calculate the required yield of a certain investment (Öhrlings PricewaterhouseCoopers, 2007). The required yield on equity depends on the risk-free interest rate and market risk premium, both in turn depending on the repo rate. The risk-free rate is the expected return on a default-free, hence risk-free, investment, and is usually based on a 5- or 10-year government bond’s yield to maturity. Hence, the repo rate affects the risk-free rate and by proxy the required yield. The professional services firm Öhrlings PricewaterhousCoopers (PWC) annually conducts a study about the market risk premium and the risk-free rate on the Swedish stock market (Walberg, J, 2017). The aim of the study is to regularly measure the perception of the market risk premium. When the latest findings were published, the premium was at a record level, as the study started in 1998. Regarding the risk-free rate, the data in chart 3.1 suggests that, in Sweden, the use of either the 5- or 10-year government bonds as a reference are most common. Chart 3.1: Most preferred method to estimate the risk-free rate in Sweden between 2013 and 2017. Source: Walberg, J, 2017. Rate March 2013 March 2014 March 2015 March 2016 March 2017 10-year bond 54% 69% 66% 55% 62% 5-year bond 10% 19% 17% 13% 11% Other rate 26% 13% 17% 32% 27% 3.1.4 ZIRP and NIRP In Keynesian Economics, there is a phenomenon known as a “liquidity trap” (Krugman, 2000). It is characterised as a situation when a central bank lowers its interest rates all the way down to zero, without really affecting investing, consumption or price levels. In this scenario, a central bank has lowered its interest rates all the way down to zero. Instead of spending or investing, consumers and companies start saving. Hence, the liquidity trap creates a situation where monetary policy becomes ineffective. In 2014, the Riksbank introduced a zero-interest rate policy (ZIRP) and was effectively in a liquidity trap (Spence, 2015). However, in 2015 the Riksbank went one step further and defied, Monetary policies and expectations Repo Rate STIBOR Market Interest Rates The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 12 one could argue, the logic of the liquidity trap. They did what many previously would have thought impossible: introduced a negative interest rate policy (NIRP) (Riksbanken, n.d.f; Spence, 2015). They brought it down below zero in order to increase inflation, aiming for the 2% target. The new policy implicated that depositing money at the central bank imposed a cost. With rates in the negative, savers do not attain any return on their money deposited in banks. Therefore, consumers and companies become incentivised to take on more credit to consume and invest. In theory, the new incentive structures should lead to a hefty credit expansion. 3.1.5 Hypothesised effects on solvency Fregert and Jonung, 2014 argue that a boom period in combination with low interest rates could increase solvency8. They suggest that low interest rates in a boom period are likely to increase borrowing. Moreover, asset prices increase at a higher rate than CPI. According to Fregert and Jonung (2014), this leads to equity increasing faster in value than total assets. They argue that this is due to extensive leverage. Hence, in boom times when borrowing is high, solvency increases. This would contradict the logic that solvency declines when borrowing is high. In the next chapter 3.2 Optimal capital structure, this question regarding solvency will be further discussed and additional views presented. 3.2 Optimal capital structure There are two main types of capital related to financing projects or investments: debt and equity (Marks et al., 2009). Debt is a credit liability, whilst equity is the value of an ownership interest in the company, i.e. stocks. A firm’s capital structure is defined as the amount of the firm’s debt and equity, including the debt and equity used to fund its capital and operating investments. There are many several types of debt and equity used in corporate financing. However, as this report’s focus is mainly on how the repo rate affects the choice of capital structure, only the most common types of debt will be discussed. 3.2.1 Equity As equity represents shareholders’ ownership in a company, the shareholders are entitled to an equivalent share in any profit (Downes and Goodman, 2014). In a start-up firm, the initial capital needed is usually supplied by the entrepreneur, but in most cases the firm will sooner or later be in the need of more capital. Then there are several possible sources from which to seek funding (Berk and DeMarzo, 2016). To raise outside equity capital, firms can seek capital from external investors or from the public stock exchange. A company deciding to sell part of its stocks, i.e. equity, publicly on the stock exchange for the first time, transacts an initial public offering, IPO (Berk, and DeMarzo, 2016). 8 A company’s solvency is equity value divided by the value of all assets. It is one way of characterizing capital structure. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 13 The main purpose with an IPO is to access capital. Going public offers access to more capital than from individual investors. Also, it increases the exposure of the company and its business. 3.2.2 Why use debt as leverage? Leverage can be defined as “The process of increasing risk and potential return on an asset through borrowing.” (Kay, 2016). Companies’ main incentive for using debt to finance investments is that leverage can multiply the return on invested capital. When allocated successfully, it can generate remarkable revenues at low cost (Krefetz, 1986). Leverage is not risk-free, but the risk is usually considered worthwhile, simply because the more capital invested, the greater the potential return. Another significant advantage of increasing the debt- to-equity ratio, i.e. use leverage, is that it gives the company’s owners the opportunity to maintain their equity in the firm (Kay, 2016). Optimising a company’s capital structure can be a complex process. Evaluating the risk of default in repaying debt, plus the interest rate, and balance it with the availability of equity, is an essential part (Marks et al., 2009). Many factors need to be considered in each situation, e.g. the stage of the company and industry dynamics. In general, a start-up would go for equity, in the absence of assets and cashflow, whilst a well-established company would usually prefer debt financing (Hamburg Coplan, 2016). However, these assumptions vary, depending on financial circumstances and the creditors willingness to lend money. To summarize, the capital structure depends on many factors. Within this report mainly interest rate will be the considered and evaluated factor. The following sections 3.2.3, 3.2.4 and 3.2.5 present the major theories on how firms choose their capital structure. 3.2.3 Modigliani-Miller Theorem Nobel laureates Franco Modigliani and Merton Miller (1958) showed that, in perfect capital markets, capital structure is irrelevant for market value as well as for Weighted Average Cost of Capital (WACC). This is the classic model on capital structure and is known as the Modigliani-Miller Theorem. When adding taxes to the model, however, increased debt means tax savings (Frank and Goyal, 2007). Consequently, managers generate greater returns to shareholders if they increase the debt-to-equity ratio. In this case, maximising firm value, is done by increasing debt to a 100%. The authors move on to discuss how other market imperfections would affect the model. In practice, capital markets and corporate environments are much more complex than the M&M-model accounts for. However, the M&M theory of capital structure laid the groundwork for much of the future study of capital structure (Frank and Goyal, 2007). For instance, what could offset the effects of taxes? The Trade-off theory grew out of this debate and will be discussed next. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 14 3.2.4 Trade-off theory The trade-off theory of capital structure starts with the assumption that there are both costs and benefits associated with debt (Frank and Goyal, 2007). In other words, here lies the proverbial trade-off. According to the theorem, an optimal capital structure is found when these costs are balanced against the benefits (see figure 3.3). Figure 3.3: Trade-off theory – debt benefits and costs. Author's own copyright. A classic version of this theory is the so-called static theory of optimal capital structure. It claims that companies balance the risk of default against the tax savings debt provides. Therefore, companies benefit from combining debt and equity when funding their investments. This generates greater returns to shareholders, compared to returns from an all-equity firm (Marks et al., 2009). Too much leverage might lead to business failure when things do not go as planned, and a too careful strategy with not enough capital to invest may result in missed market opportunities. Also, excessive cost of capital may decrease the company’s appeal to investors and shareholders. 3.2.5 Pecking order theory Another contrasting theory of capital structure is the Pecking-order theory (Frank and Goyal, 2007). This theory states that companies do not aim at a targeted capital structure. Instead, they choose funding in a pecking order (see figure 3.4). Companies, according to this theory, prefer to finance new projects with internal funding, such as retained earnings. If this is not an option, the company moves on to debt funding. The last and most undesirable option is financing through equity issuance. Figure 3.4: Pecking order theory. Funding preference order. Author's own copyright. Debt costs e.g risk of bankruptcy Debt benefits • e.g tax deductions Internal funding Debt Equity The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 15 There are several ways to derive this pecking order. One way to derive a pecking order is to assume the exitance of an information asymmetry between managers and shareholders. Managers are said to have more information about the company than outside actors (Chen and Chen, 2011). It is argued that companies signal economic strength when using own capital for funding new investments. However, if external financing is required, the theory emphasises that companies first and foremost use bank loans before other types of funding, i.e. equity. Equity issuance is particularly sensitive, since it would not be issued if the stock was undervalued9. Equity issuance would signal to the shareholders that the stock is overvalued, which leads to a drop in stock price. All in all, this is the result of information asymmetry, and leads to the company foregoing the equity option. According to the pecking order theory, the pecking order is expected to be more pronounced when information asymmetries are larger (Ni and Yu, 2008). Smaller companies would be one such instance. There are several operationalisations of capital structure. In this thesis, capital structure will be operationalised as firm solvency (see equation 1 for definition). Equation 1 𝑆𝑜𝑙𝑣𝑒𝑛𝑐𝑦 = 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 3.3 Debt composition Debt issued to finance corporate investments can be divided into two separate categories: private and publicly traded debt (Marks et al., 2009). The categories have different priority: subordinated or unsubordinated. Private debt is usually a bank loan and public debt often bonds. 3.3.1 Common types of private debt When a company seeks to fund an investment, they should consider which kind of debt is most suitable for the given situation. Different types of debt have different risks and priority. The most common types of debt are presented in chart 3.2. 9 In more technical terms, this is known as adverse selection. High quality companies are not selected for because of information asymmetry. For the classic and instructive “lemons” example see (Akerlof,1970). The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 16 Chart 3.2: Different types of debt. Author's own copyright. Type of debt Explanation Senior debt Senior debt is of highest priority. Most loans issued by a bank to companies are of senior kind. In case of a default, this debt is paid back first. Therefore, there is low risk for the creditor. The interest rate is low and thus also yield. (E. Mårtensson, personal communication, 2 March, 2017) Junior debt Junior debt has lower priority than senior debt, i.e. in case of default, junior debt is paid back to the creditor after senior debt. Lower priority implies more risk for the creditor, who, consequently, demands a higher interest for the loan. (E. Mårtensson, personal communication, 2 March, 2017) Mezzanine debt Mezzanine is a hybrid of debt and equity. In the case of default, the debt is converted to equity. Mezzanine is of lower priority than junior debt. Mezzanine investors’ increased risk is balanced with higher interest rate (Marks et al., 2009; Crawford, 1987). Payment in kind loan, PIK Like mezzanine debt, a PIK loan is a combination of debt and equity. However, for the PIK loan, the interest rate increases as the lender’s creditworthiness decreases (Kay, 2016; Investopedia, n.d.i). It has a onetime pay-out at maturity, and this sum includes accumulated interest rate on the taken loan. The figure below presents the risk and potential return associated with the different types of private debt as well as equity. In case of default, senior debt is the first debt to be paid back, and equity holders are the last to be paid back. Hence, the risk of not getting paid is increasing the further to the right the debt is placed. Higher risk consequently results in higher interest on the loan for the debtor. This leads to a form of pecking order (see figure 3.5). Figure 3.5: A schematic description of the relation between diverse types of debt. The x- axis, risk, represents how creditors are prioritised in case the debtor defaults. The y-axis, potential return, describes the possible revenue for the creditor, or investor, and cost for the debtor. It was created based on the literature in combination with information gathered from the bank interviews. Author's own copyright. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 17 3.3.2 Corporate bonds Corporate bonds are issued by a company to finance some kind of investment. Corporate bonds is an alternative to bank loans and equity. The term bond usually refers to a debt with maturity of at least one year. Bonds can be divided into two distinct categories (Berk and DeMarzo, 2016): • investment grade – bonds with low default rate and subsequently low interest. • high yield – bonds characterised by higher risk of default and therefore a higher interest rate. With corporate bonds, companies can diversify their financing (Bonthron, 2014). Crucially, corporate bonds make companies less dependent on bank loans. The strict covenants of bank loans make them less flexible than bonds. Low interest climates push investors to seek their return in high-yield bonds, instead of in investment grade bonds. 3.3.3 Bond market vs stock market Capital always seeks yield. Where it can find yield varies depending on interest rates. As discussed above, expansionary monetary policy and low interest rates encourages borrowing and spending, as opposed to saving. The opposite is true in a high interest rate environment (Millard, 2016). High interest rates attract more investors to the bond market, and low interest rates makes stocks more desirable (Forbes, 2016). There exists an inverse relationship between interest rates and bond prices, i.e. when interest rates increase, bond prices decrease, and vice versa (Wells Fargo, n.d) So, when interest rates rise, and hence the yield, bonds become more attractive. This since the price decreases, and one can receive higher yield than obtained from stocks (Barclays Bank, 2017). Low interest rates stimulate the “investment appetite”, money becomes cheap and spending therefore increases (Millard, 2016). When interest rates are low, the bond yield is low, as explained. However, low interest rates benefit the stock markets as more money can be invested, resulting in increasing demand, which in turn drives up asset prices. As a result, stocks become more attractive than bonds in this type of expansionary monetary environment (see figure 3.6). Figure 3.6: Relation between interest rates and bond prices. Author's own copyright. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 18 3.4 Economic sustainability Sustainability can be divided into three sub-concepts: Social-, Environmental- and Economic Sustainability (Hansmann et al, 2012). These three overlap and interact. Financial crises, for instance, can have considerable social implications (Otker-Robe and Podpiera, 2013). This was regarded as one of the primary reasons for the bailouts during the financial crisis 07/08 (Collins, 2015, July 14). Economic sustainability is not a well-defined concept (Doane and MacGillivray, 2001). Several different definitions have been proposed. The following two are relevant for this study: • “Economic growth can and should occur without damaging the social fabric of a community or harming the environment” • “Maintaining high and stable levels of economic growth is one of the key objectives of sustainable development. Abandoning economic growth is not an option. But sustainable development is more than just economic growth. The quality of growth matters as well as the quantity.” Going forward, economic sustainability will refer to “Maintaining high and stable levels of economic growth”. 3.4.1 Interest rates and (un)sustainability There is a concern that if the repo rate is not kept low, it will impede growth. However, the opposing concern is that ZIRP and NIRP increases the risk for bubbles and potentially a new financial crisis. Dell'Ariccia et al. (2016) note in their report on the financial crisis of 07/08 and monetary policy that “Some hold the view that interest rates were held too low for too long in the run up to the crisis, and that this helped fuel an asset price boom, spurring financial intermediaries to increase leverage and take on excessive risks”. Soaring asset prices and bubbles One driver of bubbles is a belief that the product prices of today will be higher tomorrow (West, 1986). When this belief is widespread, investors race to invest without reflecting on the fundamental value of the product or asset. For instance, the oldest recorded case of a bubble is the “tulip mania” in 1647, during which some tulips reached the price $30,000 (O'Hara, 2008). The fundamental value of the tulips was not driving price formation, but rather the expectations of further price increases. Shortly thereafter, the bubble burst. Some argue that the low interest rates during the period leading up to the financial crisis 07/08 was a cause of the rising asset prices (Dell'Ariccia et al., 2016). In a similar vein, many economists are worried that Sweden’s low interest rates are driving up asset prices and creating a housing bubble (for a discussion see e.g. Dermani et al., 2016; Giordani et al, 2015). The Riksbank is also concerned about asset bubbles (Dillén and Sellin, 2003). They could use contractionary monetary policies to combat them. By increasing the repo rate, they could lower The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 19 the demand for money and thus also lower inflationary pressures. However, the current inflation target of the Riksbank is in terms of consumer price index, as mentioned above. Therefore, during times of low CPI inflation and high asset inflation, the Riksbank is likely to pursue an expansionary monetary policy. Bryan at. al (2001) argues that it is therefore reasonable to include asset price in the price index, which the Riksbank use as a central target variable. Wicksell's theories (1936) about monetary policy also relates to bubbles. He argues that if the interest rates do not match the natural rate of interest, this could stimulate excessive growth through a credit expansion. This growth could potentially create an endogenous credit cycle with financial bubbles as result. When these credit bubbles burst, they turn the economy into a recession, or even depression. To quote Wicksell himself: “... an upward movement of prices acts undoubtedly as a stimulus to the spirit of enterprise...for it is only too often associated with unhealthy speculation, based on what is a boom on paper rather than in actual economic fact, and culminates in over-expansion of credit, credit disturbances, and crisis.” (p.2) Systemic risk When a financial institute or company is so fundamental for the economy at large, that their default could create significant instability in the economy, there exists a systemic risk (Systemic risk, n.d.). This is a risk to the economy as a whole, and not just the individual company. When a bubble forms, it creates a systemic risk in that when the bubble burst, it can have far reaching negative consequences. Perhaps the aforementioned tulip mania in the 1600s did not affect that many people, but the bubbles of today do (Kaufman, 2000). When companies or institutions pose a significant systemic risk, they are often labelled “too big to fail”. That means the government will step in and make sure they do not default. The financial crisis of 07/08 was a case of systemic risk, where the government stepped in and made sure some key companies did not default. The European Central Bank, ECB, conducted a study of the American case after the financial crisis of 2008: Bank leverage and monetary policy’s risk-taking channel: evidence from the United States (Dell’Ariccia et al, 2016). The authors discovered that banks increase their risk- taking in low interest rate environments. This effect is less pronounced in poorly capitalised banks, meaning it is more evident in well capitalised banks. This is probably due to that poorly capitalised banks are more prone to risk, even before low interest rates. The effect is in a statistical sense robust, but the importance of their finding should not be exaggerated. It is however an indication of how systemic risk can increase due to expansionary monetary policy. 3.5 Additional literature To perform a comprehensive analysis of the primary and secondary data, many sources needed to be studied. Therefore, additional literature has been used. Below in chart 3.3 is a quick summary of these sources. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 20 Chart 3.3: Summary of additional literature used. Author's own copyright. Literature Relevance The Rationale Behind Capital Structure Decisions: Does Theory Explain Practice? (Severin and Rademark (2006) Severin and Rademark (2006) interviewed CFOs regarding capital structure and compared their reasoning with the major theories on capital structure (e.g. trade-off theory and pecking-order theory). Malinvestment in relation to business cycles and interest rates Human action (von Mises, L.) von Mises discuss the rationality behind the economy. By looking at individuals and incentives, von Mises tries to explain complex market phenomena. His discussion of malinvestment and overinvestment will be used in the analysis section. Explaining Malinvestment and Overinvestment (Sechrest, L.) Sechrest expands on the theory of unsustainable economic expansion by elaborating on the concept of malinvestment and overinvestment. The debate around expansionary monetary policy: Svensson vs Riksbank Monetary Policy and Japan’s Liquidity Trap (Svensson, L. E. O.) Svensson discusses the use of a Fool Proof Way (FPW) for Japan to end their deflation. He discusses the use of Quantative Easing, ZIRP and strategies for escaping the liquidity trap. Review of Riksbank’s Monetary policy 2010-2015 (Goodfriend and King) This is a review of the monetary policies undertaken by the Riksbank in the years 2010 to 2015. It is a comprehensive study of the rationale behind ZIRP and NIRP. Articles, op-eds and written reflections by Paul Krugman Paul Krugman is a leading economist and Nobel laureate. He has at length voiced his opinions about the monetary policies undertaken by the Riksbank, often opposing them and outright critiquing them. Speeches, press releases, minutes of meetings, reports published by Riksbank. Official communiqués made by the Riksbank have been studied to understand the rationale behind the ZIRP and NIRP. This concludes the literature review. The central themes of this study have been covered: monetary policy, capital structure, debt and economic sustainability. Next, chapter 4 Results, will describe key measures related to these themes and how they have developed in the last decade leading up to 2017 as well the interview study results. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 21 4 RESULT In this chapter, the results from the secondary data and the interviews will be presented. The chapter will be divided in the following sub-chapters: • Trends during the last decade; • Academics’ view on the present economic environment; • Two perspectives on the current situation. 4.1 Trends during the last decade This section aims to give an overview over what has occurred during the last ten years in terms of key measures. Data for inflation, repo rate, capital structure and debt are presented. At the end of this chapter new banking regulations are discussed, since these play an important role when companies choose their debt compositions. 4.1.1 Inflation and repo rate As of 1993, the Riksbank’s primary target is to maintain price stability. To this end, a target inflation rate of 2% per year has been set. Following the financial crisis of 07/08, the relation between business cycles and inflation does not hold. Sweden has had low inflation (see figure 4.1) despite growth. Recovering from the recession, inflation plummeted in 2012 and stayed low, despite a low repo rate and significant growth (Statistics Sweden, n.d.b). This was a completely new situation where inflation did not seem to budge despite a, in historic terms, extremely low repo rate (see figure 4.2). Figure 4.1: Historical CPI inflation. Y-axis is inflation measured as CPI. The x-axis is year (Statistics Sweden, n.d.a). Author's own copyright. 2,2 2,5 0,5 0,5 -0,2 0,5 1 2,4 2,2 1,9 0,4 0,5 1,4 2,2 3,4 -0,3 1,3 2,6 0,9 0 -0,2 0 1 -1 -0,5 0 0,5 1 1,5 2 2,5 3 3,5 4 C P I Year The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 22 Figure 4.2: Riksbank’s repo rate in a ten-year interval. Y-axis is the repo rate in %. X- axis is year (Riksbanken, n.d.f). Author's own copyright. 4.1.2 Capital structure The figure below shows the capital structure, in terms of debt and equity, of all Swedish companies listed as either small-, mid- or large-cap on the stock exchanges NASDAQ Stockholm or First North. The capital structure is in this report, as previously mentioned, operationalised as solvency, i.e. equity in relation to all assets. Figure 4.3: Solvency for Swedish listed companies over time. Y-axis shows solvency as operationalised in equation 1 (p.15). Data is found in Appendix H-K. Author's own copyright. -1 0 1 2 3 4 5 6 R e o p r a te ( % ) Year Introduction of ZIRP Introduction of NIRP 35,0 40,0 45,0 50,0 55,0 60,0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q4 2016 S o lv e n c y ( % ) Year Large cap Mid cap Small cap First North The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 23 The general pattern for all companies apart from small cap companies are: 1) a solvency increase in the 2008 - 2009 period; 2) a decrease in solvency until 2014; 3) an increase from there up to and including 2016. It should be noted however that company solvency has in general stayed quite stable. The solvency of small-cap companies follows a different pattern. The solvency of these companies has decreased as the repo rate has decreased. Potential reasons for the differing patterns of small cap versus large cap companies will be explored in the analysis chapter. 4.1.3 Bank lending Corporate bonds are not the only securities on the rise. Monetary financial institutions (MFI) are lending more than ever. MFIs include banks and other financial institutions that lend money10. Figure 4.4 shows how MFIs and banks are continuously increasing their lending11. The banks are in essence creating money (Cervenka, 2013). Therefore, the supply of money is increasing rapidly (see figure 4.5). Figure 4.4: Lending in Sweden for both Banks and MFI. Y-axis is the accumulated amount of lending each month. Sweden (Statistics Sweden, n.d.c). Author's own copyright. From 2014, when ZIRP was introduced, there is steeper increase in money supply in terms of M1 (see figure 4.5). There are different definitions of money supply, and M1 is one of those 10 “Monetary Financial Institutions (MFIs) include banks, mortgage institutions, financial companies, municipal and corporate-financed institutions, monetary securities companies and monetary investment funds (money market funds)” – Riksbank 11 Note the bump around the financial crisis of 07/08 0 500000 1000000 1500000 2000000 2500000 2 0 0 2 M 0 1 2 0 0 2 M 0 6 2 0 0 2 M 1 1 2 0 0 3 M 0 4 2 0 0 3 M 0 9 2 0 0 4 M 0 2 2 0 0 4 M 0 7 2 0 0 4 M 1 2 2 0 0 5 M 0 5 2 0 0 5 M 1 0 2 0 0 6 M 0 3 2 0 0 6 M 0 8 2 0 0 7 M 0 1 2 0 0 7 M 0 6 2 0 0 7 M 1 1 2 0 0 8 M 0 4 2 0 0 8 M 0 9 2 0 0 9 M 0 2 2 0 0 9 M 0 7 2 0 0 9 M 1 2 2 0 1 0 M 0 5 2 0 1 0 M 1 0 2 0 1 1 M 0 3 2 0 1 1 M 0 8 2 0 1 2 M 0 1 2 0 1 2 M 0 6 2 0 1 2 M 1 1 2 0 1 3 M 0 4 2 0 1 3 M 0 9 2 0 1 4 M 0 2 2 0 1 4 M 0 7 2 0 1 4 M 1 2 2 0 1 5 M 0 5 2 0 1 5 M 1 0 2 0 1 6 M 0 3 2 0 1 6 M 0 8 2 0 1 7 M 0 1 L e n d in g ( S w e d is h K ro n a ) Year and month MFI Banker The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 24 definitions (ECB, n.d.). M1 include assets that can be liquidated and be put to use instantly. That includes all cash and money on bank accounts that can be used immediately. Figure 4.5: M1. Money supply in Sweden (Statistics Sweden, n.d.d). Author's own copyright. Moreover, trends show that the usage of new, previsouly rare types of debt, is increasing. As will be discussed in the next chapter, there is a belief amongst interviewees that cheap money is partly the reason for the growth of the high-yield bond market. Four trends have been noted by scholars: • the fraction of corporate bonds in relation to regular bank loans is increasing (Bonthron, 2014); • the fraction of high yield bonds is increasing (Bonthron, 2014); • the fraction of corporate bonds without credit rating is increasing (Bonthron, 2014); • the fraction of loans without collateral is increasing (Svanäng and Lindblad, 2013). 4.1.4 Bank regulations In the aftermath of the financial crisis of 07/08, stricter regulations were seen as necessary to avoid future crises and bank collapses (Riksbanken, 2011). The Basel Committee, an international committee for banking supervisory, presented a new category of regulations after the 07/08 crisis, called Basel III. This new framework, for liquidity and capital requirements for banks, originates from earlier regulations, Basel I and Basel II. Basel III was approved by the Swedish government in 2010, and is to be implemented sequentially from 2013 and fully set in practice in January 2019. The main differences from Basel II are raised and tightened capital requirements. For instance, can Goodwill12 and hybrid capital not be included to the 12 Goodwill is the amount exceeding the purchased company's value in an acquisition. 0 500 000 1 000 000 1 500 000 2 000 000 2 500 000 3 000 000 M 1 ( S w e d is h K ro n a ) Year and third month each year ZIRP and NIRP were introduced The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 25 same extent in core capital13. When Basel III is fully implemented, the banks will need to have a tier-1 capital ratio14 above 7%. During Basel I, all Swedish banks were using the same standard when assessing risk. Since Basel II was introduced, they determine their own risk levels based on internal models (Bank for International Settlements, 2008). The tier-1 capital ratio combined with the risk modelling could be compared with the Swedish mortgage loans needs to be capitalised up to 15%. This higher figure, 15%, is in place to protect the banks from households defaulting. Households, implicitly take on the role as a bulwark against financial instability, which was criticised by the economist Johan Grip in a widely-publicised opinion piece in the Swedish paper Dagens Nyheter (2016). The critique was iterated by Grip and other economists and practitioners in the financial sector in an episode of the podcast Kapitalet (Bursell, 2016a; Bursell, 2016b). This episode is part of a series covering the banking sector's capitalisation and risk modelling. The Riksbank and FI have for similar reasons as Grip advocated for higher capital requirements than what is stated in Basel III. They argue that this is a necessity due to relative size of the financial market in Sweden. A large financial sector, relative the whole economy, can result in negative effects in case of a bank crisis (Ekholm, 2013). The Swedish banks did however perform good on a 2016 EU-wide stress test (Finansinspektionen, 2016), showing an increased resilience against a sharp deterioration of the economic environment. 4.2 Academics view of the present economic environment Three academics were interviewed about the economic sustainability of NIRP and ZIRP. Below is a quick summary of their thoughts. Christian Sandström Dr Christian Sandström, Associate Professor at Chalmers University and Technology and the Ratio Institute argues that the current inflation target has potentially grown outdated. His work is primarily focused on technological change and digitalisation. He notes that as more products are digitised prices are pushed downwards. Dr Sandström argues that this is done by two mechanisms primarily: • digital products are subject to Moore’s law15 and thus reduce in price over time; • digitalization of markets (e.g. e-commerce) make them more efficient (e.g. by reducing transaction costs). 13 Core capital consists primarily of equity and retained earnings, and the minimum amount the bank is obliged to have at hand to meet regulations. 14 Tier-1 capital ratio is the equity capital divided by the risk weighted assets. 15 Moore’s law says that computer processing power is doubled every other year (Mooreslaw, n.d). This is an observed phenomenon and is the reason why digital products decrease in price over time. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 26 Jan Jörnmark Dr Jörnmark is not worried about low inflation. He argued that it is more dangerous for an economy to have high inflation. He says that Sweden is potentially in a liquidity trap. Moreover, he says that Moore’s law and globalization is an important reason for the low inflation. When asked about the target of 2% inflation, Dr Jörnmark said the target seemed a bit arbitrary. Jan Jörnmark is an economic historian that has written much about the housing market and housing bubbles. When discussing the possibility of a housing bubble with Dr Jörnmark he explains that he does not worry about housing prices. Rather, what some mistake for a housing bubble, is just a change in relative prices. Taylan Mavruk Dr Taylan Mavruk is a senior lecturer and Assistant Professor of Business Administration at University of Gothenburg. He is part of the Industrial and Financial Management Group. Mr Mavruk studies the fields of empirical portfolio choice; biases in investing, primarily local and home biases; risk-taking behaviour of mutual fund managers. Mr Mavruk emphasised the strong local factor of home locality in investing and that people tend to want to invest in companies, stocks or other securities that they are familiar with. 4.3 Practitioner perspectives on ZIRP and NIRP A total of nine interviews with investment banks and investment firms were conducted. First, the investment bankers’ view on ZIRP and NIRP, and their effect on corporate financing decisions, will be presented. Thereafter, the investment firms’ perspective will be presented. 4.3.1 The investment bank perspective According to several of the interviewees, the repo rate controls the market in a significant manner. They explain that it sets the required yields, and therefore controls the different types of investments made. Some of the interviewees argue that the low interest rates have forced investors towards investments with higher risk, in order to receive the same yield as they would have for instance five years ago. The consensus was that higher risk is necessary for a potential high yield, as it cannot be generated through low risk investments, with today’s monetary policy. All interviewees implied that the expansionary policy has increased inflow of capital to the financial market. As a result, they argued, companies are more eager to take on debt and the subsequent risk. Furthermore, the relatively cheap capital has encouraged companies to borrow money and save it for future needs, instead of investing it. However, some of the interviewees argued that their overall impression is that companies in general have increased their debt-to- equity ratio because of the low interest rates, and shows a slightly more “aggressive” attitude in their financial structures. This is somewhat confirmed for smaller companies later in this thesis, in an analysis of solvency. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 27 Moreover, the interviewees explained how the financial market today is in a completely new situation, as the current boom is not contracted by higher repo rate, but prompted by the negative. This contradicts the “textbook solution”, which explains that booms should be contracted with a higher repo rate. The number of IPOs has also increased, which is common during a boom, but has even reached a record-high level during ZIRP and NIRP. As discussed by several of the interviewees, capital markets are extremely complicated and hard to evaluate. However, the concluded opinion seems to be that the economy might not be going in the right direction with the current monetary policy. Changes in capital structure during the last five years The financial crisis of 07/08 resulted in a significant increase of control over the financial system by external authorities, as well as tightened regulations, according to the interviewees. They suggest that the aim with this strategy is to maintain financial stability. Although banks have become more willing to lend, they have new and higher demands16 on companies wanting to borrow money. The interviewees claim to see some of the same tendencies in the market as before the recent crisis. However, some of them argued, today there are more regulations and not the same variations in corporate-loan-ratios as before. The interviewees explained that capital in search for higher yield has flowed to the stock market, as the repo rate has decreased. Additionally, they argued that the high yield market has grown, especially on the corporate bond market. They explained this is due to investors’ need to take on more risk to gain desired yield. Another explanation for the growing corporate bond market, highlighted by one of the interviewed, are regulations. In difference from bank loans, which puts the debtor under more pressure because of high demands, corporate bonds do not require the same type of assurance as loans. Moreover, this is particularly true regarding high yield bonds, which is why they are sometimes preferred. Regarding economic sustainability, it plays a substantial part when advising companies on the most suitable capital structure, according to the interviewees. They pointed out that companies always aim to maximise yield, and return on equity. Although this is done by using leverage, they highlight that managing the risk, that follows from taking on debt, is vital to survive. Bankers’ view on ZIRP and NIRP A common opinion among the interviewees was that ZIRP and NIRP have put Swedish markets in an entirely new situation. This, according to the interviewees, is due to the Riksbank’s solid focus on the predetermined inflation rate. One of the interviewees discussed alternative choices, but ZIRP and NIRP were considered the only feasible options, since a rapid increase in repo rate could potentially put Sweden in a situation similar to the recent financial crisis. Though it eventually must be done, the interviewees agreed that the financial market is in a sensitive position, and emphasise the importance of increasing the repo rate with great care. 16 E.g. regarding due diligence and credit assessment. The Impact of a Negative Repo Rate on Corporate Financing Decisions: the Swedish case Bachelor’s Thesis Chalmers University Spring ’17 TEXK04-17-27 28 Furthermore, several of the interviewees questioned whether ZIRP and NIRP are sustainable in the long run. They argue that these policies normalise high debt quotes, due to the low cost of debt, and stated that a following consequence could be increased risk for both creditors and debtors. One interviewee suggested it could have been better to stay on a zero interest rate policy, to maintain stable asset prices and a lower level of aggregated debt. Some of the interviewees also highlighted the relevance of increasing the Riksbank’s scope. It was suggested that a wider view on the financial market in general could form a better foundation when deciding on monetary policy. They agreed that the Riksbank have been too focused on the inflation rate, and that it is a real existing issue. Another common opinion among the interviewees was the extensive involvement of Finansinspektionen, FI, and regulations are more problematic than helpful for the banks’ function. A more unregulated financial sector, where the system could operate more as a market economy, was desired. To summarise, a wider view of the financial system and less focus on the inflation rate could lead to better decisions by the Riksbank, according to the interviewees. Moreover, all five agreed on the fact that the aim for a 2% inflation is outdated in today’s modern financial climate. 4.3.2 The investment firm perspective A series of three interviews were conducted with professionals on the “buy-side” of the market. All three of the interviewees were investment managers in three different investment firms. Availability of credit has increased significantly There was a broad consensus amongst the investment managers that ZIRP and NIRP has made borrowing significantly easier. One of the investment managers, Charlie, explicitly stated that it is “extremely clear” that banks want to issue debt. All three of the interviewed professionals explained that, in general, investment firms accrue more debt today than previously. They also mentioned that the costs for buyouts are noticeably higher than previously. One of the interviewees, investment manager Alpha, believed the increase in cost is due to investment firms having more capital than ever before. According to the investment firms, NIRP has made it unattractive for entities, such as mutual pension funds, to deposit their capital in banks or invest in low-risk bonds. The “need for yield” has driven such investors towards investment firms. This cash injection coupled with readily available debt have driven the price points up. The relationship with the banks has continued to be good, even after the introduction of ZIRP or NIRP. Therefore, all three investment managers were unified in the view that neither themselves as firms, nor their portfolio companies, notice any notable change in the availability of credit from bank loans. Changing loan patterns A common theme throughout the interviews was the notion that a change in loan patterns have occurred. Regarding debt, all three companies primarily want to utilise bank loans. In general, The Impact of a Ne