SBB Norden – Journey continues
All,
Please find our updated analysis here
The recent swap of the Community Assets for a stake in the Norwegian company Public Private Invest will leave SBB with sufficient liquidity to meet its maturities through to November 2028. SBB has time; the LTVs for the SUNs are beginning to approach levels where a future refinance is feasible, but we are definitely not there yet. Whilst SBB continues its liquidity journey, we are not convinced that the company will be able to return to the capital markets in 2028 to sell HoldCo bonds, offering a leveraged play on the Scandinavian real estate market.
Investment Considerations
- We are not taking a position in the SBB bonds; we are not convinced that SBB is going to reach a point where it can return to the capital markets.
- SBB has the liquidity to redeem the 2027 bonds, but they are trading at 94c/€ already (YTW <6.5%), so the upside is capped presently.
- The SEK7.3bn €0.75% bonds due in November 2028 are trading at a YTW of 7.5% (82.7c/€). We see a potential for 10 points of upside and 6 points of downside if they trade out to >10%. We expect that SBB will need to deal with this maturity by selling parts of its stakes in Community/Residential (or Education to Brookfield), as the alternative is hoping a rising Real Estate market bails them out. SBB doesn’t need to rush this fence, so the upside will take time to come
- We see LTV for the SUNs at 77% through the SUNs and 93% through the hybrids. Applying a 15% distressed discount to the valuations, the headroom for the SUNs is extinguished. However, if we start to see valuation uplifts in the real estate market, we could be tempted.
- Survival will require Real Estate valuations to rise.
- SBB has liquidity through to Q4 2028 and could see part of its PPI/Resi stakes if it needed liquidity.
- Management has done an excellent job staying in the game this long, but increasingly it needs yields in the Real Estate market to fall, increasing LTV headroom.
- SBB is now an investment HoldCo with three arms: Education stake valued at SEK12.8bn, Brookfield now controls and consolidates the division; Community stake comprising 40% of PPI valued at SEK21.2bn, and a Residential stake valued at SEK8.2bn comprising 60% of the business (the other 40% was floated). All three of the divisions have at least one IG rating.
- The Refinance of the €750m 0.75% November 2028 will need further liquidity, and at this point, we are not convinced that SBB will be able to access the Capital markets at sustainable rates, even then.
- The community asset sale was achieved at <10% discount to book value, which is a credit to management, but we are not convinced that the real estate market is going to rally hard.
Key Conclusions
- In the Relevant Credit Stats section, we estimate that the SUN asset LTV is 77% on an undiscounted basis and 93% 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.
- The sale of the community business will help meet maturities through to Q3 2028, and SBB has avoided 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).
- 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.
- 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 about 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.
Recent Trading
Q3 25 results were out on 7 November. Stable valuations and rent increases (6.6% YTD) are positive, but do not alter the fact that SBB is nowhere near being able to access the bond markets. SBB needs a major rise in valuations to make its community assets monetizable and to make its stake in the residential business more valuable. Neither seems likely in the short term, so kicking the can down the road is the strategy. Alternative debt costs exceed the rental yield, so they are not sustainable. We expect asset sales or private loans (like the MS or Castlelake facilities) to finance the SEK6bn dues in Aug/Sep 2026. However, SBB will need to repeat the trick in Q3 2027 with SEK 8bn due.
The PPI transaction solves SBB’s liquidity needs out to 2028, so it buys time. This is a positive for creditors, but it does not end the story. In 2028, SBB will still have SEK22bn of bonds, SEK2.3bn of bank debt, and SEK8.6bn of Hybrids. However, it has time to hope that a rising tide of valuation bails it out. SBB is left with a 40% equity stake in quoted entity PPI (which will own the Community assets), 62% ownership of Sveafastigheter (which owns the Residential assets), and 50% of Nordiqus (which owns the Education assets)
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055