SBB Norden – Of Aladdin, Tricks and Magic Carpets
All,
Please find our unchanged analysis here.
Aladdin will have to close his bazaar and the last customer just walked out. The cautious traveller is of much-fabled wealth; he knows the customs. Perhaps that is why he has stepped back. The men remember each other well. Not long ago, Aladdin had pretended to be a man of wealth himself, surrendering to him, only after repeated pleas, title to the back half of his magic carpet and not before exhausting his extensive repertoire of hesitant coquetry that is commonly reserved to those who accumulate, never trade. The price was high.
But the cat is out of the bag. Aladdin has been found a penniless merchant and his only customers are holding credit notes. A policeman on the corner lifts an eyebrow; another agent junks his reputation; the wind is blowing. The sombre customer wants to buy the front half that also holds the secret to flying it. But chewing on his initial deceit and already entitled to half the carpet, is determined to drive the hardest bargain. He has not walked far.
Aladdin is in haste. He owes 28 crowns worth to all the creditors in town and needs at least 7 before they return. But he needs them twice. Aladdin has a past and from time to time, foreign creditors also haunt him. Since his reputation has dropped, he can no longer trade them off against one another. That’s when Aladdin decides to try an old trick: Maybe if he can show the money first to his local creditors, they will be satisfied and lend it back to him. That would buy him time to pay his foreign creditors! The deal would be risky and as he runs after the traveller, he realises: If he strikes the bargain without first securing his local creditors’ consent, he could still go to jail - and he’ll have lost the carpet too.
In a comic reversion of roles, it is Aladdin who now goes looking for his creditors all over town. Now it’s up to them to exhaust their repertoire of excuses. One is on holiday, the other refers to a third… There are many - creditors and excuses. That’s when Aladdin notices another thing: If he goes to jail - with the carpet, everyone else will lose out as well. So he too goes on a holiday.
We are still watching this wonderful story unfold. Will wise council bring them all together? Will Aladdin escape the policeman? Would you bet on him?
SBB’s (Aladdin’s Bazaar is actually set in Sweden) recently released operational results were poor, and the failure to sell the remaining 51% in the Education Business places SBBs liquidity under severe pressure. Between now and Jan-27, SBB has SEK28bn of bond maturities and up to SEK27bn of bank facilities to roll. Piecemeal sales of assets or even deals like the SEK2.6bn of senior capital being raised from Morgan Stanley are not enough, and SBB needs larger sales and an agreement with its banks to roll senior facilities. The agencies have joined the pessimism of investors.
Investment considerations:
- We are still not taking a position. Only if SBB can secure the sale of Education in tandem with convincing its banks to roll their facilities can it avoid restructuring. Even if the banks agree to roll financing through Jan-27, SBB would have no guarantee of returning to the capital markets, but in time it would have a shot.
- We see a sale of the Education Stake as contingent on a solution for the bank debt, but if that requires herding too many cats SBB would be looking to hold on to the assets in a restructuring.
- The short end of the curve is vulnerable to SBB seeking a restructuring prior to the Feb-24 € maturity. This bond has repriced in the last few days to reflect its vulnerability. In a restructuring, all the SUNs will almost certainly be treated as a single class. We don’t think the Adler precedent applies.
- So to express a pessimistic view, the bond curve offers a flattening trade. Alternatively, the long end of the curve is ultimately value protected.
- LTV on our analysis is 68% through the SUNs. Our total asset valuation is 16% lower than SBB (LTV is 52% using the SBB valuations).
- The asset sale process is in SBB's hands only as long as the banks play along.
Restructuring is likely absent the sale of the Education Company:
- Our analysis shows that only a sale of the remaining 51% can generate the capital needed to avoid a restructuring and provide the c company with three years of time.
- We expect the next catalyst will come in October; the next big maturity is in Feb-24, SEK6.5bn of €0.550%. Not much is likely to happen in the dog days of the European summer.
- Our valuation of the 51% stake was SEK8bn (with no control premium). The shareholder loan of SEK14.5bn is on top of that. We have assumed Brookfield would pay SEK20bn; if that dropped to SEK 18bn, SBB would be funded to Sep-26 when the SEK5.5bn €1.130% fall due. If the banks agree to roll, sales proceeds of SEK18bn would be just about sufficient; below SEK18bn, SBB may as well hold on to the assets and enter a formal restructuring process.
- With a holding of 49%, Brookfield is in a strong negotiating position. Even if there is no pre-emption language, finding an alternative buyer willing to stamp on Brookfield's toes would be difficult. We expect that Brookfield is negotiating a discount, and a price will be agreed upon. However, the risk of a failure of SBB is higher and grows the longer no deal emerges.
- The agreement between Brookfield and SBB is not in the public domain, so we do not know what rights it has. The Education Company assets are the best in SBB’s portfolio, so any administrator will be required to negotiate.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055