Debt-Addicted Landlord Struggles to Keep a Roof Over its Head

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Wall Street Journal Logo

August 21, 2023

By guest author Carol Ryan from the Wall Street Journal.

This column is part of the seventh annual Heard on the Street stock-picking contest.

August 21, 2023

By guest author Carol Ryan from the Wall Street Journal.

 

 

The founder of SBB once said the property company could withstand interest rates of 10 %. In reality, less dramatic increases have turned the stock into a bonanza for short sellers.

The Swedish landlord was set up in 2016 and borrowed heavily over the next few years to pay for its growing property empire. SBB was “hooked on the crack of cheap debt,” according to Viceroy Research founder Fraser Perring, whose hedge fund published a critical report about the company last year and questioned whether it was valuing its assets properly. Sweden’s financial regulator has since launched an investigation into the company.

SBB has been struggling to refinance its debts since Sweden’s central bank began raising its policy rate, which has gone from 0.75 % a year ago to 3.75 % today. On the company’s latest earnings call, SBB’s new chief executive officer said debt was equivalent to 52 % of the value of its assets. But Edoardo Gili, analyst at real-estate research firm Green Street, estimates the number is 74 % once hybrid bonds and recent falls in property values are factored in.

SBB is in a tight spot as its market value has fallen to 6.6 billion Swedish kronor, equivalent to around USD 600 million at current exchange rates, following a 77 % plunge in its share price since January. This is dwarfed by the company’s debts, which add up to USD 7.4 billion. Of these loans, USD 2.5 billion mature over the next two years. SBB only has enough money to pay back three-quarters of that based on the cash it has on hand and the operating cash flow the company is expected to generate between now and then.

Refinancing is proving very difficult. In May, ratings agency S&P Global downgraded SBB to junk, which led to an immediate 1.25 percentage point jump in interest margins on some of its outstanding bonds. In a sign of the level of distress at SBB, its 700-million-euro—equivalent to about $760 million—note maturing in five years trades at a 12% yield to maturity.

The company managed to raise some funds in July by selling preference shares to a Morgan Stanley real-estate fund, but had to guarantee a 13% return for five years to get the deal done. This annoyed some bondholders who complained the new pact undermined SBB’s existing creditors. Another group of bondholders say the company has already breached debt covenants for its interest coverage ratio.

SBB is racing to sell properties to raise cash, but progress has been slow. Talks with Canadian real-estate investor Brookfield Asset Management about selling a stake in its portfolio of education buildings fell apart last month.

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