SBB - Observing The Forest
All,
Please find our unchanged analysis here
The recent tender offer from SBB has prompted us to look at our valuations; we are now updating our model but wanted to share our initial thoughts with you all. The divisional structure is a clever way to help investors see the wood from the trees. The negative is that bondholders now have equity investments in Three vehicles (where SBB is a minority in two, with a majority of Residential to be sold). We are glad that SBB has acknowledged that the previous blob of assets was not financeable, and this cleaner structure has more chance. The company is still vulnerable to further falls in value, and equity valuations are more volatile (as a rule) than asset valuations.
Investment Considerations:
- The uncertainty about SBB getting a strategic partner to take a majority stake in its residential portfolio leaves us on the sidelines for now. The upside of 15 points is not sufficient to risk the 20 points of downside if a deal does not emerge.
- We can see the argument that the Jan-25 € will be covered by liquidity from the sale of a stake in the Residential assets. In this event, the upside is 15 points over two years (IRR 10%), and the downside is 20 points, as any delay in the sale would put the Jan-25s trading in line with the 2027 and later maturities.
- By creating standalone divisions, SBB is improving its chances of lasting long enough for a rising valuation tide to create equity value.
- The new divisions will be able to raise debt, which will layer bondholders, but the amount of debt will be modest and will only rise further with valuation rises.
- SBB has more chance of getting the banks onside if the lending is to the new divisional structure.
- We see the Fir Tree litigation as an annoyance rather than dangerous. However, if Fir Tree was successful, SBB would have to seek court protection in Norway to get a stay.
The potential value in Residential assets could push liquidity to Jan-25:
- If the proposed sale of a stake in the Residential assets happens, SBB would have liquidity beyond the maturity of the Jan 25 notes.
- We estimate SEK12bn in potential cash from a sale of 60% of the Residential assets (NOI SEK1.5bn, Yield 5%, LTV 30% (bank debt), disposal of 60%). The target will be an IG rating.
- There is an upside in that an issue of SUNs (taking LTV to 40%) would raise an additional SEK3bn. An LTV of 40% should attract an IG rating. If a majority stake is sold, SBB will no longer control the debt level or the payment of dividends.
- Our thesis still depends on cooperation from the banks. The bank debt needs to travel along with the assets into the silos, and then the banks would need to agree to raise their LTV from 20% to 30%. SBB has already said it is looking at the US private placement market to plug gaps between the supply of debt from the Nordics and what it needs.
SBB needs to stay in the game if the equity is to have any value
- Using our rough valuation estimates, LTV is about 90% => equity option value of cSEK10bn.
- This assumes that the existing bank debt of SEK19bn moves to the new divisions and another SEK6bn of debt is available to the units.
- The structure is still stressed. Even under our new valuation scenario, the SUNs are at 63% LTV. A partial sale of Residential could be at a discount to asset value given the stress at SBB.
- The completion today of the latest Education Company tranche with Brookfield releases the SEK8.2bn of liquidity for SBB.
Fir Tree Interest cover claim is unlikely to succeed:
- We do not expect Fir Tree to succeed in its attempts to prove a breach of the interest cover covenant. The methodology for calculating interest cover in the documentation is unclear. Fir Tree has a point that under previous presentations, gains from property revaluations were used in the calculation (and are now excluded). However, the document is silent on exactly how the coverage calculation should be done.
Fir Tree's concern about tender seems hard to understand:
- The paragraph Renunciation of tile and claims (page 18 of the document) refers specifically to Securities blocked in the clearing house account (due to being tendered) and the sale of such securities to SBB (as part of the tender). The tendered securities are blocked until the tender is settled or the offer is terminated.
- SBB could extend the tender, leaving the securities blocked longer than expected, but eventually, SBB would have to complete or cancel. There is no point in SBB creating distrust with its creditors over a tender for <10% of its debt.
- Fir Tree does make a valid point about the Hybrids. There are €1.5bn in Hybrids outstanding and we estimate SBB has €40m to spend at a tender price of 15c/€. If the full €40m was spent at that level it would equal €230m or 15% of the Hybrids. When the Hybrids switch to PIK coupons, the equity option will disappear quickly. €40m barely makes a dent in the debt stack for SBB but could be crucial for keeping shareholders incentivised to stay on board. Either way, finding hybrid holders willing to exit at these levels will not be easy.
I look forward to discussing this with you all
Aengus
T: +44 203 744 7055