SBB Norden - The mist is rising.
All,
Please find our updated analysis here.
The uncertainty surrounding the value of the SBB assets is receding, although the bonds are trading at near-fair value. There is an upside if assets begin to trade near book valuations, but SBB is a long way from either that or a situation where it can rejoin the capital markets. The company will be able to continue kicking the can down the road for a while longer, but eventually, the gap between book and executable valuations is still too much.
Investment Considerations:
- We are not taking a position on SBB Norden at this time. The picture on valuations is getting clearer, but the ability of SBB to dispose of assets to meet short-term maturities distorts things.
- SBB can deal with the €510m 2.375% August 2027 SUNS and the July 2027 SUNS through asset sales or a mixture of funds + an exchange offer.
- The August 26 and July 27 SUNs both have around 12 points of upside. SBB would prefer to exchange or extend these bonds, but with SEK16bn of maturing bonds between November 28 and October 29, there will be pressure to attempt an extensive rescheduling of the rest. The 2026/2027 bonds have 20 points of downside if they trade in line with the 2028 maturities.
- The SEK16bn of H2 2027 maturities will be a crunch time for SBB. We cannot see SBB being able to return to the capital markets.
- Our asset valuation has the SUNs 90% covered before applying a distressed discount. Once that is applied, coverage is around 63%. We see some upside from development assets and a reduction in the discount to net book value at the Residential business.
- The November 28 maturities are closer to our expected recovery in the mid-60s.
- Survival would require Real Estate valuations to rise.
- The residential business sale was at the lower end of our expectations, and the asset trades at a 50% discount to book value, whereas 25% is more normal. We don’t see this changing as long as SBB is in control, as investors will remain concerned about cash being extracted to support the holding company.
Key Conclusions:
- In the Relevant Credit Stats section, we estimate that SUN asset coverage is 90% on an undiscounted basis and 63% once we apply distressed discounts to the assets.
- SBB needs the Real Estate market to rally if it is to see LTV fall to levels where it can refinance itself in the capital markets.
- The Recent Trading section shows that we expect the August 2026 maturity can be funded through asset sales or an exchange offer. There is a possibility that the July 27 maturities may also be made from further asset sales. However, beyond that, we cannot see how the attempt to generate shareholder value can succeed unless SBB can execute external sales at near-book value.
- As the liquidity section shows, SBB has sufficient liquidity to meet the modest bond repayments in 2025. This assumes that the SEK5bn of bank debt is rolled. The consolidated bank debt has been pushed into the majority held but independent units (Residential/Community), which has improved the relationship with lenders and led to more debt being rolled. We would also expect sales from the Community asset portfolio to be used to meet the 2026 bond maturities.
- The December Exchange process removed the risk of acceleration under the EMTN programme and led to the Fir Tree Litigation being settled. It bought more time for SBB, although it only marginally changed the leverage issue.
- Our Model shows that SBB generates enough free cash to cover its interest bill, but not to make significant reductions in debt. As a result, SBB will rely on asset sales or falling yields to make progress on reducing LTV.
- Eventually, we would expect Brookfield to take full control of Nordiqus, but it will not rush. No other institutional investor is likely to buy a minority stake in a portfolio of this size without control, so Brookfield is the only buyer.
- In the Community business section, an IPO would help meet maturities, but SBB needs to avoid an excessive discount to book value. High-quality lessees (local government-funded service providers) mean the yields should be linked to the sovereign borrowing cost (+200bps)
- The Residential business section shows that the assets trade at a discount to book of more than 50%, which offers a potential upside for the equity, but as long as SBB controls the company, we are not convinced the gap to a more normal level of 25% will be reached as investors will remain concerned of intercompany transactions favouring SBB.
- From the Development portfolio section, there are several development assets that we have previously either discarded or discounted significantly. We still discount these assets but have added some portion to our assessment of value. These assets offer some potential upside if SBB can secure external finance. A sale would be our preferred exit, as management needs to remain focused.
- After the initial shock when inflation returned to the system, Real Estate yields in the Scandi countries have returned to stability. Also, if interest rates in EUR and SEK continue to fall, we may see some downward pressure on real estate yields.
- The value of the "Other" segment is only c€100m, so not material in terms of the future of SBB.
We would expect recoveries to be in the mid-60s:
- We value the assets of SBB at around 90c/€. After applying a distressed discount, our fair value for the SUNs is around 63c/€
- There is some upside in the Sveastigether business, which trades at >50% discount to book value (vs a more normal 25%), but we do not see that discount closing as long as SBB remains in control.
- We also apply significant discounts to the development assets, which, if sold, could generate further cash.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055