SBB - The wheels on the bus

All,

Please find our updated analysis here.

SBB faces the same debt maturity issues as the rest of the Real Estate industry. Having gorged itself on cheap debt, SBB is now being squeezed by higher borrowing rates and lower valuations. For now, SBB has sufficient liquidity to continue financing its SUNs' maturities from cash resources. However, the need for support from its banks means SBB could lose control of the process. In that spirit, the recent announcement of the sale of most of SBB’s stake in JM AB was as much about convincing the banks to continue lending as it was about the €250m raised. The proposed cancellation of the dividend is in the same category as a bridge-building exercise. 

Investment Consideration:

- We are not taking a position presently. The next catalyst will be the refinance of SBB’s loan to Education Company (later this year), the additional SEK13.5bn of capacity could allow SBB to cover maturities out to Jan-2027. There are SEK9.4bn of maturities to Nov-24, with a further SEK12.3bn through January 2027. However, would that be sufficient time for SBB to return to issuing in the capital markets? The omens are not good

- Even the most cursory glance at the amortisation of bank loans points to three years as a normal term, this implies SBB will need to get the banks to roll SEK10bn a year in facilities to maintain its liquidity.

- Sarria values the total assets of SBB at €10.5bn, debt is €6.7bn with a further €1.4bn in Hybrid securities => €2.4bn in equity value. The discount to the market capitalisation of €1bn strongly hints that the equity market is even more bearish than us. 

- LTV on Sarria’s analysis is 65% through the SUNs. Although, our total asset valuation is 29% lower than SBB (LTV is 46% using the company’s own valuations). However, the process is in SBBs own hands for now.

Recent events point to cash preservation:

- The banks are putting the squeeze on SBB to generate more cash. 

- Quarter-end (March) Cash on hand at SBB was SEK5.4bn in our calculations.

- Since then, the company has been working to shore up cash.

- SBB is cancelling its dividend (requiring an EGM in June), the sum saved will be around SEK2.5bn, broadly the same as SBB intended to raise in a D Share rights issue it had to abandon. 

- A further 2.8bn was raised from the sale of shares in JM AB (a Swedish developer).

- The company is hoping to refinance its SEK14.5bn intercompany loan to the Education Company EduCo). A rating is being sought for EduCo, targeting BBB. 

SBB has time but maybe not as much as it hopes:

SBB has enough cash to refinance debt as it falls due and to enter 2027 with a bank debt LTV of 31%, SSNs at 56% and Hybrids at 71%. This requires banks to suspend amortisation and any enforcement opportunities that could occur with covenant breaches.  

- SBB has SEK33bn of bank debt, any acceleration event covenant breach or even maturities could see control of this process move from favouring equity to favouring creditors. In reality, the banks will be driving the bus here when they decide to take the wheel.

- A sale to Nordic or EU institutional investors would be a clean exit for the banks. There is no change of control clause, so bondholders will not get paid out (although they may improve their credit risk.

- Our analysis points to the banks nudging SBB towards a sale, Bank LTV is closer to 20% than 40%, yet SEK3bn of facilities were allowed to lapse in the previous quarter. 

- Refinancing the SEK13.5bn loan from SBB to Education Company and releasing the cash is crucial for SBB.

I look forward to discussing this with you all. 

Aengus