SBB – Every little helps.
All,
Please find slightly our updated model here.
Getting the Residential deal done is still the game changer, but not much concrete has happened regarding finding a partner or getting an IPO away. The proposed exchange offer from SBB will attract support, particularly in the Hybrids. A cash coupon and going from being badly structured preference equity to being a bondholder is a bonus. The impact on the SUNs is small, but every little helps. The most eye-catching part of the SBB Exchange proposal announcement is that SEK10.4bn of bank debt be refinanced. The local banks have not helped so far. However, getting bank debt down to SEK5bn would preserve liquidity particularly if short-end lenders finally roll some debt.
Investment Rationale
- The exchange offer is a sideshow. There is a small liquidity leak, but it is not enough to change the fundamental importance of getting a part disposal/IPO of the residential business completed.
- The next catalyst is the part disposal or IPO of the Residential business. However, the ECB is beginning to quiz banks on RE exposure, and hopes for multiple rate cuts in Europe in 2024 are fading. We can see the residential sale slipping into 2025, and SBB buying time by shoring up liquidity by further asset disposals/JVs in the community business.
- We are not expecting strong guidance on the sale in the Q2 call and can see the bonds drifting lower, but going short the longer end of the curve could prove expensive. The upside/downside of such a trade is balanced.
- SBB has liquidity through 2024, but will need to raise cash if the Residential sale does slip into 2025.
- With secured borrowing at >8%, SUNs will not trade inside of 10% in what is still a distressed balance sheet. The upside for the €2026 bonds is five points, but the downside is 10. They are not yet attractive given our concerns about delays/disappointment in the Residential sale.
- The 1.130% € Sep 2026 bonds trade at 83c/€ (YTW 13%). If there is a delay in executing the Residential sale, these bonds will trade in line with the August 2027 € notes (69c/€).
- The € Jan 2025 bonds trade at 93c/€ (YTW 14%), SBB has the liquidity to redeem these, but with only €145m remaining outstanding, liquidity will be minimal.
- Longer-dated paper is trading towards a recovery value, but in the event of the residential sale failing they would visit the 50s. The exchange proposal offers a marginal benefit to the hybrids (but not much).
- Post the Exchange we expect LTV of 65% through the SUNs, but if we apply distressed discounts to the equity holdings, that rises to 70% (80% if we apply similar discounts to the real estate assets held directly).
Liquidity is tight into year-end, but SBB has options to secure further cash:
- We see a need for SEK1.1bn (€100m) in the rest of the year. It is hugely unlikely that a €5bn capital structure would fail for this amount.
- With both the Castlelake deals SBB has over SEK11bn in cash, but it has scheduled bank maturities of SEK7bn and SUNs of SEK1bn by year-end. There could be €3.3bn in bank loans, which would require SBB to complete the refi of the Education shareholder loan (SEK3.3bn) or face a cash flow shortfall of SEK1.3bn.
- We are sceptical that the Residential sale will be completed by Q4 and SBB may want to buy time to hope for a better market in 2025 (with more rate cuts).
- We expect further liquidity enhancements via another asset sale in the community business will be announced.
The Exchange bond on offer represents <5% of SUNs/Hybrids outstanding:
- The exchange offer is aimed at the long-end SUNs and the Hybrids. We expect mostly Hybrid holders to bite. SUNs holders will see their LTV at 65%, with overall LTV falling from 81% to 75%. The beneficiary here is the equity option value.
- SBB has said it will look to harvest the biggest discounts in accepting securities, which heavily favours Hybrids (trading c33.5c/€, before the offer) and longer-dated SUNs (2040 SUNs trade at 49c/€).
- LTV through the Hybrids is 81%, this would fall to 77% if SEK2.0bn were issued against Hybrids tendered at 39c/€. The SEK2bn bond is an obligation of the Resi company.
- The 20% cash payment would be <SEK450m, so LTV through the SUNs rises slightly as cash flows out.
- We value the package at 34.3c/€, in line with current trading. Were the new securities to trade into 6.75% => 8 points of upside. We would expect value to break in the SUNs if SBB fails.
- SBB’s Aug-27 SUNS trade at 12.75%, the new 4.5% Jan 2027 notes should trade at a premium, which we estimate at 100bp. This would give a price of 85c/€.
The proposed Residential business balance sheet is <50 LTV:
- We see the sale/IPO slipping into 2025.
- SBB has not yet secured the SEK10.4bn bank loan for the residential business. We do not know what the impact on the existing bank debt repayment schedule is, so assessing the impact on liquidity is guesswork. The banks have been completely unhelpful so far, there is no guarantee they will help now.
- If 50% of residential is sold there is a potential payment of SEK7.25bn to SBB. However, there is no timetable for completion. SBB has not yet secured the SEK10.4bn in bank Debt.
- Total assets in the Residential company are SEK27.8bn, with debt of SEK12.4bn => equity of SEK14.5bn.
Repurchasing D Shares is small beer:
- The cost of <€40m represents a small but irritating negative for Bondholders with liquidity leaking to shareholders. D shares were used as part payment for acquisitions in the past.
- At today’s price the cost of the buyback is around SEK400m (€37m). 50m accounts for 25% of the D shares outstanding.
- The D shares would fall from 5% of the votes to 4% (D shares have 1/10th of a vote, vs A shares).
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055