SBB - Transformation
All,
Please find our updated analysis here.
SBB is transforming from a Real Estate investor to a Real Estate holding company. The challenge is staying in the game long enough to complete the metamorphosis. The equity assets owned will all have debt and SBB will try and generate value for shareholders by a mixture of additional leverage at the HoldCo level. In the meantime, SBB needs to raise more cash from asset sales and persuade its local bankers that it is worth helping. Without the domestic banks, wanting to be involved, it is hard to make a case for becoming an unsecured note holder unless the bonds are a lot lower.
Investment Considerations:
- We are not ready to take a position in SBB, but the fog is clearing. The company has made progress in part disposing of the Education business and is preparing the same for the Residential assets. The next catalyst will be the IPO or partial sale of the Residential business (likely in 24Q3). If the 24Q2 call has no update, investors will begin to fret.
- 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, market liquidity in the bonds 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 50’s
- LTV is 62% 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).
- SBB has liquidity through to 25Q2, but beyond that, it will need the cash released by the Residential disposal. The Scandi banks are not lending and are being repaid with expensive external debt, leaving bondholders further layered. The lack of local bank interest in lending to SBB does not point to a return to the Capital Markets by 2027.
- The latest Castlelake deal should secure liquidity to redeem the Jan 2025 notes. The € Sep-2025 SUNs trading price assumes a good chance of redemption at maturity; this will only be feasible if the Residential disposal/IPO cash has arrived.
- The Swedish residential market is only slowly stabilising, and we can see delays in executing a part disposal/IPO in 2024. A delay would weigh heavily on the bonds.
LTV is still high:
- Our headline LTV is around 62% pro forma for both Castlelake deals (we have adjusted for Kapan Bostad coming back on BS). However, if we apply distressed valuation, LTV rises to 83% through the SUNs. When Hybrids are included, LTV rises to 80%.
- The equity holdings are already levered. SBB could try to raise debt on the equity stakes (like Ardgah Group), but we estimate no more than SEK3bn could be raised.
- Our SEK73bn asset value estimate is 21% below the SEK91bn of the company, but that contains SEK10bn of building rights, which we are valuing at zero for now. Including building rights, the difference is 11%
Extracting value from equity stakes will not be easy:
- SBB will be held to ransom by its JV partners if it needs to access the equity in the JVs or sell and repay. These are high-yielding and well-collateralised assets, and exiting will not be cheap. We expect a partial sale of the Residential business, which means SBB will face the same loss of control.
- Around 30% of the SEK73bn value is now in equity holdings, mostly non-public
- Extracting dividends and liquidity from these businesses will be a challenge as Brookfield and whoever is in charge of the Residential business will want to harvest cash to expand rather than pay dividends out. If SBB sells a majority stake in Residential (as they plan), they will not be able to structure a deal as Ardagh Group did with Ardagh Metal Packaging. Dividends in the Residential business will be decided by an independent board.
JV’s with Castlelake mainly help the banks:
- The JV’s smack of desperation from SBB and opportunism from Castlelake. Across both JVs, the LTV is under 60%. With interest rates starting to fall, the Real Estate market is slowly stabilising. Castlelake should have an attractive asset. From SBBs perspective, the additional liquidity is only SEK2.5bn (€215m) as bank debt attached to the assets moving into the JV needs repaying.
- Of the SEK11bn to be lent by Castlelake, we expect SEK7.5bn of bank debt will need repaying. We estimate that the first tranche had a 43% LTV, and we have assumed 40% across both assets.
- SBB will sell SEK18.9bn of assets into the JV, and the cSEK8bn of equity in the JV should be retained by SBB as long as it keeps to the loan terms. The properties in the JV should generate sufficient cash to service the loan. We expect that the loan will be non-amortising.
- SBB has not commented on whether the terms contain LTV or Interest coverage language. Can the JV be sold? Can the loan be repaid without penalty? Management at SBB has proven reticent to provide details.
Liquidity adequacy depends on asset sales:
- SBB has adequate liquidity to make it through 2024, but without cash from the Residential sale, the company will run out of liquidity in Q3 2025.
- The local banks have provided no help to SBB, and we do not see that changing. Our analysis shows much of the Castlake cash being used to pay down local banks. Fine for liquidity but not a long-term solution.
Aengus
T: +44 203 744 7055