SBB – Nothing but the same old story.
All,
Please find our updated analysis here.
Despite all of the noise, at its heart, SBB is still an over-leveraged business reliant on surviving long enough for a rising real estate market to bail it out. We expect management will sell assets to provide liquidity to deal with maturities in 2026. SBB is also considering the sale of the Community Asset business, which could provide liquidity to Q2 2029, but at the cost of extinguishing any value for the equity. Sale prices will be at discounts and the assets are unlikely to cover the Hybrids, let alone offer anything for the equity. A restructuring of debt will be necessary, preserving maybe 5% - 10% of SBB for existing equity holders, but management is not ready to face that reality.
Investment Considerations:
- The SBB structure is unlikely to survive, but the final reckoning can be pushed further into the future by raising liquidity from the Residential and/or community portfolios.
- We expect management to kick the can down the road and raise cash to repay the €675 2.375% August 2027s. At 87c/€, they offer 13 points of upside and 20 points of downside.
- SBB is creating lower leveraged subsidiaries, which can get an IG rating. However, the SUNs are increasingly stranded at HoldCo with no direct security over the underlying assets or the equity stakes.
- SBB needs Real Estate valuations to rise. In the short term, ECB rate cuts will help stabilise valuations.
The December exchange offer bought SBB more time:
- The legal threat from Fir Tree to seek acceleration of the EMTNs was removed. Over 95% of EMTN holders exchanged into bonds that are closer to the assets and in return, gave up the Interest Cover maintenance test.
- Hybrid holders took the opportunity to be uptiered
- However, the leverage is still too high. LTV through the SUNs is 73% (when adjusted for the IPO of the residential business). Also, if we apply distressed discounts to the equity holdings, that rises to 91%.
- SBB has bought more time but is not out of the woods.
2025 Maturities are covered, 2026 not so much:
- Whilst proceeds from the Residential IPO were at the lower end of our expectations, SBB generated enough cash to meet its maturities through Q2 2026. Also, SBB has managed to get a Scandinavian bank to extend a new line.
- However, SBB is nowhere near being able to issue in the capital markets and will need fresh cash in Q3 2026.
- The next pressure point will be August 2026 when a €500m SUN matures.
- We estimate the potential value of selling the Community Business is >SEK20bn, which would fund maturities until Q3 2029.
- SBB will want to avoid disposing of any of its business units because management feels that valuations (and equity prices) are still too low.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055