SBB – Walls closing in
All,
Please find our updated analysis here.
The SBB board and its banks are taking control of what happens to the business next. The strategic review is now contemplating a sale of part or all of the business. Several questions immediately come to mind; what is the business worth; is there a buyer out there, and what is the impact on bond prices? We have altered our valuation adjustments to reflect market performance in the Nordics in Q123. We also have made a correction to our model, which has no impact on our findings.
Investment Considerations.
- We are not taking a position right now as there is too much uncertainty around the strategic review of SBB.
- It looks like lenders are encouraging SBB towards selling the company.
- A buyer could easily get control of SBB as part of an amend and extend arrangement with creditors. The EMTN notes do contain CoC put language, if there is also a downgrade at the time the change in control occurs. Ensuring any comprehensive agreement can be reached will require a stay to prevent acceleration. The Hybrids also have CoC language, but only a 500bp coupon increase, rather than a put.
- We see value in the long end of the SSNs (from Aug-27), even if we assume that they also extend by 3-4 years.
How much is SBB worth?
- We place a value of SEK 118bn on the entire business, which equates to 65% LTV through the SSNs.
- Total equity capitalisation is only SEK8bn, and a raise of SEK10bn would still only reduce LTV to 59%. Something more comprehensive is needed.
- Our yield rate on SBB’s portfolio is 5.8%, but we acknowledge that we are above the 5% the company uses and above the commercial rates in recent JLL reports. However, the Swedish real estate market could see more pain.
Is there a buyer out there?
- Different classes of assets make finding a single buyer a challenge, but the lack of a change of control clause means control could be obtained as part of a court-mandated process that involved pushing out maturities.
- Sweden's government will not want to see municipal buildings (including courthouses/police stations) hawked around the market. They will encourage pension fund involvement.
- The relatively untested Swedish insolvency process is another challenge. Any court process will likely have to include Swedish and English law.
Process.
- The process for any restructuring is likely to require a dual track in the English and Swedish courts. Sweden for the stay and England for access to precedents.
- As the bonds are largely under English law, restructuring SBB would usually involve the English courts. However, the lack of a bond trustee complicates things in this case.
- The automatic stay, preventing some holders from seeking an acceleration is possible, under the new Swedish insolvency regime. However, this new insolvency process was only put in place in Aug-22, and Sweden lacks previous cases of this complexity.
The long-end SSNs would benefit most from a rescheduling.
- The SEK3.6bn of bonds due between now Sep-23 will probably need to be repaid at par.
- The next SEK12.7bn of bonds (to Jan-25) face the sharpest losses.
- Persuading bondholders to roll into longer-dated is going to be unattractive to holders of shorter-dated paper covered by existing liquidity (if the banks continue to cooperate on the secured debt)
- The Jan-25 €SSN has about 10 points of upside and 15 of downside. The €Nov-29 have 30 points of upside and 10 of downside. If a deal could be structured.
- The skew in benefits to the long end could complicate matters. However, the likelihood of cross-holdings across the maturities is high => an agreement could be reached.
- SBB has €700m of Social Bonds outstanding, some holders of these bonds are claiming an event of default on these notes. SBB has said in a press release that it is in compliance with its covenants. We have not had sight of the Social Bond prospectus (€700m 0.55%/24) yet.
How might such a deal be structured?
- To incentivise the SSNs to roll their exposure into a 5-year note at 6%, we are assuming a 10-point cash payment.
- We assume a new 5-year bond with a 6% coupon, the cash payment => 2 points a year giving an effective coupon closer to 8%. A 10% YTW on this bond would equate to 90c/€ recovery. Enough to persuade bondholders to stay with the company.
- In our model, the Hybrids are at 90% LTV, an uncomfortable position for Hybrid holders.
- An SEK10bn (€900m) cash injection (say in exchange for 90% of the equity) could reduce the LTV through the hybrids to 82% (with an equity kicker).
- Paying under €1bn to get control of €118bn of assets, with no substantial bond maturities for five years is a bet, but given the nature of the assets and their location in the Nordics, it is not outside the realms of possibility. Residential Assets and state-used buildings will hold their Yields better than most.
I look forward to discussing this with you all
Aengus
T: +44 203 744 7055