SBB Norden – 72
All,
Please find our updated analysis here.
Even if SBB completes its deal with Brookline for the rest of the Education Company, it will still need the support of its banks in rolling secured debt whilst SUNs get repaid. The banks will be under political pressure not to bring down the house, given the level of collateral they hold, but there is no guarantee.
Investment Considerations:
- There is too much uncertainty around how the SBB story plays for us to get involved yet. However, we think the Jan-25 € SUNs at 84¢/€ offer an upside if an agreement is reached with the banks. If not, and SBB goes into restructuring, we see the intrinsic value of the bonds at 72¢/€ based on how long we think a workout could take. The downside could come when the reorganisation process starts, where prices could fall into the 50¢/€ range, before recovering. Unsecured notes maturing after August-27 are progressively more attractive as they are already trading in the 60s.
- If SBB is given the time to manage its own liquidity, we see the business as financeable. However, the level of support from the lending banks is in no way a given.
- SBB needs to execute a sale of the rest of the Education company and reach an agreement with its banks on rolling their debts. Both will be tricky, but the SUNs are pricing in some form of agreement.
- The company could have enough cash to cover its maturities out to Jan-27. SBB would then need to issue SEK5-6bn a year between Aug-27 and Nov-29. Possible, but there is a lot of execution risk alongside the belief that cap rates will have come down by then.
- Our current EV SBB is SEK109bn (including SEK22bn for the 51% stake in the Education company). SEK84bn is Real estate and SEK4bn of Listed and unlisted investments. The Investments are worth between 0¢ - 8¢ for the bonds. For now, we have assumed that the investments have no value. Our analysis is already at a 35% discount to SBB’s valuation. Our analysis has the level of cash on hand post a sale of the Education Company stake equal to the level of bank debt.
Bond levels beginning to accurately reflect risk:
- In the event of a collapse of the structure FV for the SUNs is around 72c/€. SEK80bn of assets, apply a 20% distressed discount => SEK75bn of assets to cover SEK51 of SUNs = 70% LTV. Assume a desired IRR of 15% for a two-year workout and final exit at 95c/€ => FV 72c/€. The numbers would point us to the €1bn 1.13% Nov-29 SUNs, currently trading at 61c/€.
- If we were confident of the banks playing ball, our preference is the Jan-25 1.75% bonds at 84c/€ yielding 14%, we would see this as a YTM play. The €500m 1.130% Sep-26 at 67c/€ (YTM 14.4%) would have more risk if the banks diverted cash to pay down secured debt in the future.
- The hybrids have settled in the 20c/€. In the event of a court-mandated restructuring, value is likely to break in the SUNs. Hybrid bonds will need recovery time for SBB before recovering. Swedish Resi plus Municipal buildings will ultimately return to cap rates linked to the Swedish sovereign, but recovery is likely to be through equitization, with the structure currently uncertain.
SBB is financeable if it can keep control of its cash:
- SEK28bn of cash would allow SBB to refinance debt with cash out as far as Jan-27.
- On Sarria’s current analysis, the remaining SBB would then have real estate assets of SEK84bn, cash of SEK5bn, net secured debt of SEK28bn (net LTV 33%), unsecured debt of SEK28bn (LTV 33%), subordinated debt SEK17.5bn (LTV 20%), and equity SEK10.5bn (LTV 14%).
- SBB has levers to pull but doesn’t fully control them.
Is SBB now in control of its fate?
- Not quite. Even if a sale happens, SBB will need the support of its banks. Our analysis of the situation points to the banks being brought onside, but there are no guarantees.
- Along with other asset sales, SBB has nearly SEK30bn in liquidity. It also has SEK33bn of bank debt, which is falling due over the next three years.
- Bank debt is within the usual 40% LTV limit.
- The Swedish government has already expressed concern about seeing Swedish municipal assets sold to the highest bidder. Bringing the whole house of cards down when asset coverage is >2.5x will lead to uncomfortable conversations for bank executives, the financial regulator and the government. However, the commercial decision will remain with each bank.
Additional liquidity, but how much remains is not yet certain:
- If a deal for the remaining 51% of the Education Business is reached, we expect proceeds of around SEK20bn.
- The Education assets are high quality. Nevertheless, SBB is hoping to complete a transaction by July. SBB has a tight timetable and one that will require concessions.
- The Equity stake is valued at SEK9.5bn, which represents a cap rate of 4.1%. The low rate reflects the high quality of the tenant book. The level of distress at SBB will add something to the discount rate.
- There is also SEK14.5bn in intracompany loans from SBB. This loan was to be refinanced in the bank market and will need to be adjusted to reflect current conditions.
- We have assumed that a discount of around 15% needs to be applied => net proceeds of cSEK20bn.
I look forward to discussing this with you all.
Aengus