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The unspeakable has tried to pull off the unimaginable. Swedish property group Samhällsbyggnadsbolaget (SBB) has too much debt and too little time. However, a series of creative financings led by Leif Sinise, the CEO who parachuted in last year, has kept the company ahead of its creditors.
In its latest move, SBB announced on Monday that it would buy back bonds worth 163 million euros at a 60 percent discount. This should result in a profit of 245 million euros. The good news sent SBB shares up more than a tenth on Monday.
Its problems stem from a debt-fueled buying spree of health, education and social housing properties during a period of low interest rates. Since then, SBB's market capitalization has fallen by 95 percent since its peak in 2022. With net debt making up 87 percent of the enterprise value, the real estate group was forced to rush to sell assets to strengthen its balance sheet.
To add to its misery, FairTree, the US hedge fund's bondholder, has initiated legal proceedings to push the company into default over allegations that it has breached its debt covenants.
With the company's unsecured borrowing closed, SBB was forced to look for alternative financing. For example, SBB borrowed via US private debt provider Castlelake for €450 million in February. At 5 percentage points above Euribor, it is an expensive lifeline secured on a property worth just under twice the value of the loan.
Much depends on how willing banks are to renew about 700 million euros of secured loans due this year. In its favor, SBB's portfolio remains relatively attractive. Many health and education properties are occupied by government-subsidized tenants who pay inflation-linked rents.
Buying back discounted bonds helps significantly with returns. Aside from taking profits, SBB has in effect swapped unsecured debt now yielding yields in the mid-20s for loans secured at a 9 percent yield to maturity, Green Street's Eduardo Gelli said.
We expect more of the same. While SBB reported an overall loan-to-value ratio of 54 percent at the end of last year, its secured loan-to-value ratio was just 21 percent. If it pursues more of this expensive secured financing, SBB may have to raise equity from its residential portfolio, worth SEK 29 billion (€2.5 billion), most likely via a private sale.
If that fails, SBB may have to raise capital using the group's very low share price, another expensive option. Real estate investing always carries some risk, but SBB still offers a lot for most investors.
