SBB - Legally speaking
All,
Please find our unchanged analysis here.
We felt that an in-depth look at the legal scenarios facing SBB if it cannot secure sufficient liquidity, was warranted. We were never going to get comfortable being invested in SBB without understanding the documentation and what jurisdictions would be involved in any consensual process. The news this morning regarding the Edu Co does not change this.
SBB has secured an additional SEK8bn in liquidity through the repayment of SEK7.8bn of the SEK13bn shareholder loan to Edu Co and the sale of another 1.16% of the equity. The additional SEK8bn of liquidity would leave SBB funded through Jan-25. However, if the banks do not agree to roll their debt, this liquidity will disappear. The release does not address the state of play with the banks and whether any progress has been made since the publication of the 1H23 results in August. Either way, Edu Co will no longer be a consolidated holding. SBB’s new group structure (also announced today) will see Education, Residential and Community report as separate independent divisions. SBB reiterated its intention to dispose of a majority stake in Residential, although the new timetable for completion by the end of 2024, is more realistic.
Even with this morning's news, SBB is potentially running out of road in its efforts to avoid a restructuring. But restructuring the UK law bonds seems difficult. On the on hand, we are concerned that SBB would have to be a test case under the new Swedish law, which only came into effect a year ago. Moreover, its UK bonds would not automatically be bound by any restructuring in Sweden. On the other hand, these UK bonds give a direct individual claim to the holders and have no trustee or agent to bind the holders in a typical lock-up agreement. So a UK process won’t work either, as creditors could derail an agreement by filing against SBB at any time. If it comes to it and if creditors don’t want to lose control over the business, SBB may have to become the next company to restructure by way of a "dual track" process. We have seen K&E advise on Cimolai and other such transactions recently. It’s complex and expensive and we feel a little nervous about it and it’s not that different from going all out Swedish first and then approving in the UK afterwards. It’s just trying to reduce the risk around the UK process by getting the courts involved earlier. Forum Shopping is dead, long live Forum Cherry-Picking! Whilst English Law has no provisions for a stay, Swedish law does. On the other hand, English law is more settled and predictable and can bind the English law bonds. There are hurdles to using a dual-track process but it is feasible and more desirable than bankruptcy.
Investment Considerations
- We are not taking a position presently. SBB needs to get the sale of Education done but in tandem with getting its banks on board with rolling their facilities. Even with financing through Jan-27, SBB would have no guarantee of returning to the capital markets, but it would have a shot.
- LTV on Sarria’s analysis is 68% through the SUNs. Our total asset valuation is 16% lower than SBB (LTV is 52% using the SBB valuations).
- The asset sale process is in SBB's hands only as long as the banks play along.
A consensual deal for SBB will probably be dual track:
- COMI would remain in Sweden, which will be the natural venue for a restructuring. The English law bonds however need a UK procedure, where the law is more established. Each jurisdiction on its own is not sufficient to bind all creditors in a deal. So if creditors want to avoid an outright insolvency, SBB needs a consensual deal and one that “mixes" both jurisdictions or rather, uses them simultaneously.
- The new Swedish restructuring law only came into force in August 2022 and hasn’t been used in a complex restructuring yet. But it does offer x-class cram down and absolute priority. So there could be enough commonality between the two jurisdictions to reach common ground on a plan.
- In Sweden, once the court has opted to commence a process, there is an automatic 12-month stay on enforcement. The stay would prevent individual bondholders from filing against SBB - even the UK EMTNs. English law EMTNs represent the bulk of the outstanding debt and need to be the subject of the restructuring. However, as per above, SBBs EMTN (and Hybrid) notes do not have an agent or trustee, so any noteholder can go to court and seek enforcement. This flaw complicates a restructuring regardless of venue, as bondholders can directly file against the company when there is a default either in payment or through a covenant breach. It’s particularly complicated in the UK however, where the system relies on the presence of a trustee to bind creditors in a lock-up agreement.
-Value is likely to break in the Hybrids, so secured creditors can probably only enforce in Sweden during this period if they can show that they will not jeopardise the restructuring or that the process is unfairly prejudiced against them.
- We have seen a presentation by K&E that discusses this very conundrum. The firm has previously advised on at least one transaction (Flint) where a dual Swedish/English process was followed. K&E also advised Cimolai SpA in its restructuring approved in August this year. In this case, the High Court in London approved a restructuring under English law that will work parallel to an Italian Concordato Preventivo. We think it’s worth the try.
Could SBB choose a Swedish-only process?
- Yes, but the rule in Gibbs would mean the English courts would need to approve the imposition on English law bonds. So in a restructuring, courts in both jurisdictions would have to be involved in any event.
- Cram down of non-consenting creditors is possible as long as those creditors are not put in a worse position. This change brings Sweden into line with other European jurisdictions. The proportion of consenting creditors required in each class is not yet certain, but a 2/3rds majority is not unreasonable.
- There would be an automatic 12-month stay on enforcement once the court process starts, which would head off the problems caused by individual investors in the UK EMTNs being able to enforce.
- Debt haircuts and debt-equity swaps are now supported by the legislation but are new to Sweden, but we understand that particularly D/E swaps are largely untested.
- At this point, we do not know the exact structure of the bank obligations, but our analysis points to most of the bank debt being at the property holding company level. The stay would only become relevant if the banks sought to enforce guarantees over companies involved in the restructuring.
- We think the most relevant non-consensual alternative is a classic Swedish insolvency. In that case - in theory - the administrator could hive topco’s assets under a newco and topco credtors could credit bid. But the byzantine structure of the company along with the loss of control over the process make this alternative unattractive for any single investor.
What would be needed to utilise just an English law process?
- The Swedish bonds would need to agree to change their governing law to English law. All bonds (incl. UK EMTNs) would have to introduce an agent or trustee.
- The transaction would still need the approval of the Swedish courts. So given the sheer number of bond issues, this seems overly prone to fail on holdouts.
Shareholders will want to avoid a court process:
- Avoiding restructuring is possible but increasingly difficult.
- To avoid a restructuring, SBB needs its banks to roll their debt, but also be able to sell the remaining 51% of the education business. The cash raised would generate enough to repay maturing EMTNs until the capital markets had recovered sufficiently for SBB to refinance.
Potential Covenant trigger:
- The EMTNs have an interest coverage maintenance covenant at 1.5x on a rolling 12-month basis. In June 2023 the ratio was 2.9x and falling. Headroom will fall further as debt is rolled at higher rates of interest.
- If any breach is not remedied within 90 days, SBB will be in default.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055