SBB Norden - Morphing - Model Update
All,
Please find our updated analysis here.
SBB has morphed from a collection of directly held assets into an investment holding company with three separate managed businesses in Education, Community and Residential assets. Additionally, it has a development arm with cash-generating assets and participation in joint ventures. The valuation of these assets is insufficient to cover the SUNs + Hybrids issued by the company, and we see little prospect of a return to the capital markets for SBB. An A&E will be needed in 2027. We expect SBB to have the assets to fund the operation, but the securities it will target are not yet clear.
Investment Considerations:
- We are not taking a position. There are too many moving parts relative to the return profile we are seeing with any conviction right now.
- In our sum of the parts calculation, LTV through the SUNs is 85% and 109% through the Hybrids. We have not applied discounts on the public market values, as each of these already has a discount to the assets. Also, we now value the company as an investment company with an additional owned development arm.
- SBB Norden has liquidity to meet its maturities through to July 2027, and whilst the 2027 SUNs will become current from July 2026, the company will not rush this fence. We expect the Q3 26 maturity to be met. We also expect an A&E operation to be needed in early 2027, which may impact the August 2027 SUNS. The scope of the operation will be driven by whether management sells some of the equity held in the three divisions (or the development assets)
- The July 2027 SUNs will possibly be part of the A&E, trading at 97%, we see little upside here and potentially 8 points of downside (to trade in line with longer maturities).
- Any A&E will aim for a package valued at 90%, and with the longer dated SUNs trading in the mid-80’s, we see little upside in the other SUNs until after we see the shape of the A&E. The Hybrids offer a potential short, but as we expect a possible exchange offer targeting the Hybrids, it could be very expensive. As in the past, SBB will try to generate equity value by acquiring debt at a deeper discount to par.
- LTV through the SUNs is 85%, but there is little appetite amongst creditors to force a bankruptcy (even with the banks gone).
- Recovery through the Hybrids is c60c, assuming the JV/Development (SEK5.3bn Sarria value) can be realised. There could be SEK2bn upside if the market discount for the assets at Sveafastigheter fell from >30% to 20%. We do not see this as likely to occur soon.
- There is valuation upside in the Residential business; the EV is at a 32% to asset value. If the discount fell to 22% =>, the value for the Hybrids is 80%
- Our issue is not the value of the underlying assets; it’s the impact on that valuation as SBB is forced to try and refinance SEK6.5bn in 2027, SEK5.5bn in 2028 and SEK9bn in 2029.
- To try to create some equity value, there must be 1) a rally in real estate valuations that closes the GAV discounts, 2) some more asset sale-funded buy-backs (particularly in hybrids). SBB will not be able to issue in the capital markets without both of these events. The SEK7.2bn in July 2027 will require either an A&E using proceeds from the SEK3bn Morgan Stanley JV, or the partial sale of the participations SBB has.
- 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.
Key Conclusions:
- As our asset valuation section shows, LTV through the SUNs is 85%, and any recovery in the Hybrids is dependent on recoveries from the JV/Development assets. Our Maturity analysis shows that SBB can fund its 2026 maturities, but will need to do an A&E for the longer-dated SUNs (from July 2027). Proceeds from the Morgan Stanley JV will be used, as SBB will not want to sell down its participations.
- Our model section shows that SBB should be able to cover interest charges, but any debt reduction will come from Asset Sales or debt rescheduling. We do not expect SBB to return to the capital markets.
- The PPI shareholding is worth NOK7.9bn, and trades at a discount to GAV of 14%; this is in line with peers, and we do not expect a sudden fall. The Nordiqus stake is worth SEK9.5bn (plus a receivable of SEK4.3bn). Whilst education assets are in demand, Nordiqus is unlisted, and Brookfield, as the only buyer, would drive a hard bargain. SBB’s stake in Sveafastigheter is worth SEK4.5bn, and the assets here trade at >30% discount to GAV. It could offer valuation upside if this came down to a more normal 20%, but we do not see this happening in the near term as the market views SBB as an incentivised seller of part of its 60% stake. We value the Development assets at SEK3.9bn, mainly due to SEK2.5bn of cash-generating buildings.
Recent Trading
- The Q4 25 numbers are almost secondary here. SBB has sufficient cash to cover maturities to November 2028, but we are not convinced that the value of the equity participations in the Education/ Residential and Social businesses will cover the debt of the SBB Holding company. A restructuring of debt will be needed, but there is still plenty of time for management to wait for a miracle.
- SBB needs the Sveafastigheter equity to continue to rally if it is to reduce its own leverage, and the successful placing of €300m of 2031 SUNs at 4.5% will help convince the equity market of the value of this business. The new SUNs will carry a coupon in line with the yield on the residential portfolio. Part of the proceeds will be used to redeem the €183.5m of 4.75% 01/2027 SUNs, preventing them from becoming current. At present, SBB still consolidates Sveafastigheter. Our valuation of SBB is the sum of its participations in the three separate divisions.
SBB Asset Value Breaks in the Hybrids
- SUN asset coverage is 134% on an undiscounted basis and 115% once we apply distressed discounts to the assets.
- SBB has bought itself time. It has cash to meet maturities through Q3 2028.
- There is still only limited equity value. We have cut our distressed discount from 20% to 15%, and the SUNs are just about covered in this scenario.
- 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.
- There is no sign that we are there yet.
- SBB's control over the Education business is gone, and the Residential business will now be subject to stock market supervision.
I look forward to discussing this with you all
Aengus
T: +44 203 744 7055