BlackRock is about to find skeletons in $45 billion bond market

As BlackRock starts to kick the tires of Sweden's credit market at the behest of the Riksbank, a world of trouble is about to reveal itself.

"This market seems completely dead," said Hakan Karlsson, chief executive of MaxFastigheter i Sverige AB, a property firm with an unrated bond maturing in September. "If we want to retain the possibility of raising money through bonds, some kind of support is needed for it to function."

BlackRock Financial Markets Advisory, a unit of the world's biggest asset manager, was just hired to help Sweden's Riksbank figure out how to buy into an asset class that recently saw its worst rout since the financial crisis. Against the backdrop of a dispute with parliament over the legality of such purchases, the Riksbank has pledged to acquire parts of Sweden's $45 billion krona corporate bond market.

Most corporate issuers are holding back until those purchases start. They "want to see the real effect" of the Riksbank's promise, said Gustav Bjorck, who runs the bond syndication desk at Swedbank in Stockholm.

For the CEO of another real estate issuer the current market is simply too expensive. "Only those who really need to issue bonds go to the market right now," FastPartner's Sven-Olof Johansson said.

Besides questions of legality and issuer angst, there are basic concerns about market dysfunction. Many issuers have started relying more on bank credit instead of bonds. And investors are wary of a market whose recent crash was in part caused by excess representation of some high-risk industries, such as real estate.

Investors just want the dysfunction to end. "The secondary market for investment-grade bonds is far from functioning well so I think the Riksbank's program will lead to better liquidity," said Karin Haraldsson, a portfolio manager at Lannebo Fonder.

She said the Riksbank will probably buy investment-grade bonds, allowing the primary market to "open up for that category." If the Riksbank could buy newly issued notes, "that would help even more."

Back in March, the failings of Sweden's corporate bond market were forced into plain view as 35 credit funds resorted to gatings to halt a client exodus. Investors say the Riksbank's presence in the market would make a repeat unlikely.

Meanwhile, Sweden's credit market is getting riskier. An increasingly large share is junk-rated or unrated, and these issuers have found it impossible to raise funds since March.

"The high-yield market in Sweden has not yet opened," said Antti Saha, Nordea's head of debt capital markets.

Mr. Saha expects investors to "deploy cash further out on the curve" in response to any corporate bond QE, which would "help the primary market expand to a broader selection of names," including speculative-grade borrowers.

Fredrik Tauson, who manages an alternative credit fund at Nordic Cross, said Sweden's junk bond market "can from time to time be inefficient and dysfunctional." But if the Riksbank were to buy higher rated notes, investors would be more inclined to go for riskier debt as they search for better returns, he said.

That kind of change doesn't happen overnight, but Mr. Tauson said it's not clear the market can wait, "considering the depth of the current crisis."

For issuers like MaxFastigheter, time is running out. According to its CEO, "It's almost impossible to place a bond today."