Heimstaden AB - At the top of the leverage stack.

All,

Please find here an additional piece on Heimstaden AB following our note on Heimstaden Bostad earlier this week. 

We have had a couple of clients request a little more detail on the Heimstaden AB structure. We have done some additional work but overall it doesn’t change our view on the underlying opportunity. 

Investment Considerations:

- We are not taking a position at the Heimstaden AB level. Although our view on the underlying assets supports investment in the unsecured bonds at AB, the path to realising this value is not straightforward for Heimstaden AB investors. 

- Valuing Heimstaden AB’s stake in Heimstaden Bostad at Book Value, LTV for the bonds is only 20%. In fact, at Book Value, there is sufficient value to cover the Hybrids (40% LTV) and have c. SEK 23bn of equity value. Book value is a theoretical value. However, even on our valuation of Heimstaden Bostad’s assets of SEK250bn (20% discount to book or 60bps in yield widening), the bonds LTV only rises to 50%. Note, at this discount at Bostad, the Hybrids are also covered (LTV 99%).  

- Although the theoretical upside is par, with dividends suspended and liquidity tight, Heimstaden AB holders are reliant on shareholder activity to crystallise the asset value.  

- We can envisage Heimstaden AB receiving external money to tender at sub-par levels for the outstanding AB unsecured and Hybrid bonds, we don’t think there will be any progress on this in the short term. As we outline below, Heimstaden AB has (just) sufficient liquidity to meet its obligations for FY 2024, with the small SEK bond due in April 2025 likely requiring external money. 

- We do believe dividends will recommence in the medium term, they will not start before Heimstaden AB has to deal with the 2025 bonds. 

- Heimstaden AB have c. SEK 1bn of directly held assets in Denmark and Sweden, which are likely to be sold to meet medium-term liquidity.  

- The downside for these bonds is difficult to ascertain. We do see the bonds remaining current in the short term, as the controlling shareholder in Heimstaden AB maintains its option value. However, any investment in the Euro Unsecured bonds at Heimstaden AB is reliant on crystallising value from their equity holding in Heimstaden Bostad. We see better risk-reward to the underlying assets in the Hybrids at Heimstaden Bostad. 

Liquidity

- Heimstaden Bostad has suspended dividends, even for the Preference A’s which leaves Heimstaden AB reliant on its own resources to meet its upcoming maturities and coupons. 

- Heimstaden AB’s cash balance at year end was c. SEK 1bn, but this has been reduced by c.SEK 300m from the repayment of the 2024 SEK bonds. The balance, SEK 700m is just sufficient to meet cash interest for FY24 on its secured debt and unsecured bonds. 

- Heimstaden AB has suspended the interest payments on its outstanding SEK Hybrids, and we expect the Euro Hybrid will be treated the same. 

Happy to discuss.

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk