Heimstaden Bostad - Another way
All,
Please find our updated model here.
We have been contemplating some alternative options available to Heimstaden Bostad’s equity holders in order to support the Company and its ratings. The perceived wisdom is that Alecta (and/or others) will provide some equity to Heimstaden Bostad to bolster its balance sheet. This probably is our default option but there is an alternative.
Investment Rationale:
- We maintain our 1% long position in the 2026 Hybrid bonds. We accept that any coupon deferral would cause the bonds to fall substantially, which is reflected in our small position. However, we maintain that the equity holders will provide some additional support to the Company, which is likely to have a disproportionate impact on these Hybrid bonds.
- We have examined the potential of a cap arb trade, shorting the unsecured and staying long the Hybrids. Although under the scenario where no equity is forthcoming, the unsecured bonds will trade-off, we see only 3-4pts off downside as the bonds are effectively asset-backed, and should have a cap of 10%.
Asset Sale:
- Another path to improving ratings etc is for Alecta (and/or others) to acquire some assets from Heimstaden Bostad. Under this scenario, there would be no dilution to existing shareholders and depending on the discount to NAV would have beneficial impact on ICR and LTV ratios. Any acquisition would likely be partially funded with debt which would reduce the overall cash requirement.
- In our scenario, we have assumed a SEK 30bn asset sale at a 10% discount to NAV. A 10% discount to NAV is the equivalent to c.33bps widening in yields. Applying this widening to the overall remaining portfolio, LTV ratios remain static at the unsecured level.
- The positive of this approach is in introduces new cash into the structure, reducing the requirement for refinancing in the coming years at more expensive rates. The ICR ratio improves to 1.72x in FY25 from 1.48x.
- Even under this proposal, Heimstanden Bostad could retain the management contract over the portfolio with only the immediate owner of the equity changing.
Scenarios:
- We have talked about various options in the past including equity injection, and potentially a conditional tender for the Hybrids or a voluntary exchange offer. Although we have created another option, it does not dilute the underlying theme that any equity injection is likely to come with conditions of subpar solution for the hybrids. We think the shareholders will be looking for ways to share pain with the Hybrids.
- We have struggled to articulate the “stick” that Heimstaden Bostad equity holders can use to force Hybrid holders into accepting a tender. We have also played through more draconian scenarios, but don’t think those are warranted in the situation. As the most likely downside in the near term, we acknowledge the risk of coupon not being paid on the Hybrid, which has increased since Heimstaden AB has improved its liquidity via the sale of the Icelandic assets.
- However, we view any cessation of the coupon as having a bigger negative impact on the rate in which the unsecured bonds could be refinanced.
- What prevents doing the asset sale at a wider discount, i.e. an asset sale at a 20% discount (equivalent to 76bps of widening)? Firstly it would be difficult to get agreement from the non-participating shareholders, and secondly would struggle to justify, given the independent KPMG report on the Icelandic assets. This would be a very aggressive stance but would encourage Hybrids to potentially “pain-share” if the discount was up for negotiations.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk