SBB Norden – Looking at the shareholders
All,
Please find our updated analysis here.
The latest liability management exercise by SBB Norden has the same element of smoke and mirrors which matches the previous exercise. The main beneficiaries are equity and hybrid holders. SUN investors have pushed back to limit the amount of promotion of Hybrids to SUNs, but it does show management is determined not to forget its equity holders. We can see little attraction for SUN holders in exchanging for small coupon uplifts and limited maturity changes. SBB may return to this part of the equation
Investment Considerations:
- We are remaining on the sidelines for now. SBB has generated enough cash to push its maturity profile further out, and it has finally managed to get a Scandinavia bank to extend a new line. However, SBB is nowhere near being able to issue in the capital markets. Also, whilst we expect the ICR litigation to fail the 2026-2029 SUNs are all trading above recovery value, if SBB loses and is forced to seek creditor protection.
- The primary objective for SBB is the Hybrid holders and the 2025 maturities.
- The Hybrid exchange will create between SEK1.2bn – SEK1.8bn of additional SUNs
- The Tender offers for the 2025 SUNs will not garner much support from bondholders, as most of the maturities are in Q1 2025 and the discounts will be too small for SBB to make much progress.
- The new 2029 SUNs to be issued to the Hybrid holders will offer value, but with only €100m - €150m in circulation, liquidity will be scarce.
- The 2027/2029 SUNs yield around 10.5% to 11%. So the upside for the €2028 bonds is five points, but the downside is 10.
- The residential business sale was at the lower end of our expectations. However, SBB has SEK6bn of cash available and a further €2.5bn in new bank lines.
- SBB is hoping for a recovery in Real Estate valuation driven by ECB cuts in 2025 and in the meantime, it is trying to increase the equity optionality by acquiring Hybrid bonds at <40c/€
- Post the Exchange we expect LTV of <60% through the SUNs, but if we apply distressed discounts to the equity holdings, that rises to 65% (75% if we apply discounts to the real estate assets held directly).
Hybrid holders should take the opportunity to climb in priority:
- SBB is offering to exchange some subordinated debt for SUNs. The new SUNs would have a 5% coupon, and mature in November 2029, after the last of the SUNs (excluding the €50m 2.75% 2040).
- There are cSEK13bn of Hybrids outstanding and SBB has said the additional SUNs will be limited to between SEK1.2bn and SEK1.8bn (between €100m and €150m). The layering for SUN holders is modest given the size of the debt stack.
- The outstanding Hybrids are trading at around 35c/€, whereas the existing 2029 SUNs yield 10.5% => a price for the exchanged bonds at 80c/€.
- We can see why SUN investors have pushed back to limit the issuance. Exchanging SEK13bn (€1.1bn) of Hybrids for SEK4.6bn (€400m) of SUNs would have meant significant layering.
SUNs, short-end tenders will be at small discounts to par:
- Apart from liquidity, the tender offers very little to SSN holders, with maturities in 25Q1. They are better off holding on to get par. If the Fir Tree EMTN litigation was a concern, these holders would be long out of this end of the curve anyway.
- SEK6.7bn of SUNs are being tendered for, but over SEK6bn of these notes mature in 25Q1. SBB will take the discounts it can get, but we expect the discounts offered in the tender will be low.
- We have never been convinced that there is a strong case that the ICR has been broken and the EMTN notes should be accelerated but nervous investors may be willing to just exit having seen the bonds trade towards par.
- The EMTN case is in January but the judgement will be after the January SSN maturities, which constitute the vast bulk of the 2025 bond maturities.
SUNs exchange offers are of marginal benefit to bondholders:
- SBB is opportunistically trying to minimise the impact of an adverse ruling in the ICR litigation on its EMTN notes but is offering little incentive for SUN holders to participate. It looks like a sideshow, but SBB could return with a better offer.
- SEK32bn of SUNs are being offered an exchange option.
- SEK6.3bn of 2026 SUNs will be invited to exchange into bonds with a higher coupon and similar maturities.
- SEK8.5bn of 2027 SUNs offered a coupon bump and slightly shorter maturity.
- SEK17bn of 2027/28 maturities will be offered similar coupons and maturities.
Liquidity has improved post the end of Q3:
- SBB has around SEK6bn on hand according to our estimates, and a further SEK2.5bn is available from a new bank loan (undrawn and signed post quarter end). The company has the liquidity to finance the tender offers as required.
I look forward to talking with you all on this.
Aengus
T: +44 203 744 7055