Epsilon Archive for Student Projects

Abstract

Landshypotek is today Sweden’s largest lending institution for land and forest owners with loan assets around 50 billion SEK. “Landshypotek AB” is owned by an economic association consisting of 52 000 members and has 19 offices all over Sweden. Its market share of first mortgage loans to land and forest owners is 38 percent. To be a member in Landshypotek ownership of land or forest are compulsory and the members have to place their mortgage in Landshypotek.

Landshypotek’s equity for 2010 was barely 3,4 billion SEK which has been built up through patronage refunds on the borrowers (members) interest payments. The members’ contributed capital constitutes just over 1 billion of the equity and the rest (2,4 billion) is Landshypotek’s unallocated equity. The equity is enough to balance today’s lending but since the market is expanding a demand for capital and Landshypotek’s future growth strategy more equity is needed. Landshypotek is therefore considering introducing a change in the financial model at the beginning of the year 2012.

In comparison with investor-owned firms, cooperatives are at a disadvantage in raising equity capital. The cooperative equity is not marketable because the distribution of earnings in cooperatives is based on patronage and not investment. As a result there are no incentives for non patrons to invest in a cooperative and cooperatives are therefore restricted to its members to raise equity. But members may be reluctant to increase their illiquid stake in a cooperative because of the non marketability of the equity. The possibility to raise equity through retained earnings may also be met with resistance from the cooperative’s members because it translates into higher costs and lower revenues for the patrons.

The aim of the study is to answer the following questions, hence the issue is if Landshypotek’s members be negative towards increasing their illiquid stake? Is the intended change of contributed capital likely to reduce the risk of free-rider problems? Are members with a long time left in Landshypotek likely to be more positive towards the intended change of contributed capital than those with a short time left? Will members terminate their business relationship with Landshypotek due to the intended change of contributed capital? How will the intended change of contributed capital affect a member’s cost of capital?

The thesis is conducted as a qualitative case study. The empirical material consists of qualitative research interviews with twelve members in Landshypotek and a study of four scenarios regarding the members’ cost of capital.

The conclusion is that Landshypotek’s members will not be negative towards increasing their illiquid stake. The members, regardless of their expected time horizon, are also positive towards the intended change of contributed capital and the members with long time left in Landshypotek are more positive towards the possibility to actively contribute with capital. The intended change of contributed capital is likely to reduce the risk of free-rider problem. It is also revealed that the members will not terminate their business activities with Landshypotek due to the intended change of contributed capital as long as Landshypotek is meeting the objective of ten percent dividend on contributed capital. Finally, the intended change of contributed capital tends to increase the cost of capital for non investing members and decrease it for investing members.