SBB Norden - Recycling to buy time
All,
Please find our initiation on SBB Norden here.
The sharp rise in the cost of debt and rental yields has left SBB struggling under the weight of its debt. Management needs time, and a secured bank facility has provided it. SBB has the resources to push out maturities and make asset sales to deleverage the balance sheet. Continued access to this facility is critical to SBB being able to avoid a restructuring or a fire sale of assets. Our analysis has the debt covered by assets, although a restructuring would reduce asset values for the forced seller. SBB could also suffer further valuation drops if the turmoil in the real estate market worsens.
Investment considerations:
- Our analysis shows the assets fully cover the debt for now, however, we are not taking a position presently until we are more comfortable with continued access to senior facilities including any covenants and a final termination date. Without access to the €750m bank facility, SBB would be in severe difficulty and would require an immediate sale forcing bond prices lower. meanwhile, SBB can seek to sell assets at yields <5.5% to generate value above our analysis or to find a buyer when the current turmoil eases.
- Swedish real estate remains challenging and property yields could rise further before normalising. Using the bank facility, EMTN maturities out to Feb-24 are covered and If the banks agreed to 40% LTV that could be stretched to Jan-27. As an alternative to restructuring this is highly attractive, however, if unsuccessful SUN's holders could find themselves a small stub of the overall debt and have been layered by significant secured debt. We will seek more information on the facility terms, and when comfortable, we might well be persuaded to take a long position in the longer-dated EMTNs.
- The residential assets are a crucial part of civil infrastructure in the Nordic region, and the non-residential are assets focused on long-term contracts with local and national governments. The structure of lessees keeps credit risk for SBB low.
- For now, we are focused on the short end of the structure, where the €750m bank facility will cover maturities. The €Jan-25 offer 3.5% in coupon and a 10% of capital uplift over the next 18 months. Moving further down the maturity is a leap we are not ready to make.
Maturities covered in the short term:
- SBB will use a secured facility of SEK8.3bn (and cash) to refinance unsecured EMTNs with secured bank debt. Without this facility, SBB would have no option but to seek a sale.
- SBB has a SEK10bn of EMTN maturities before Feb-24. Issuing unsecured EMTNs would be prohibitively expensive now, but the secured facility will cover these maturities.
- If banks were willing to extend 40% LTV, maturity coverage would extend to August-27.
- Recycling debt from unsecured to secured is far more attractive than having enforcing investment-grade EMTN documents.
At current prices, debt is covered by assets:
- Our model has LTV through the hybrids at a little over 70%.
- SBB remains vulnerable to increases in rental yields beyond the 5.5% we have used.
- However, the secured facility gives management time to await a more benign financing market and/or to execute sales inside the 5.5% yield figure used in our valuation.
I look forward to discussing this with you all.
Regards,
Aengus
T: +44 203 744 7055