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The sharp rise in interest rates has been pure poison for Swedish property company SBB, which has grown strongly in recent years with the help of heavy borrowing. Since its price peak a year and a half ago, B shares have fallen about 90 percent on the Stockholm Stock Exchange.
And on Monday, a downgrade by S&P Global Ratings sent B share down 15% and D share down 25%. The rating agency has revised its long-term credit rating to BB+ from the previous BBB-, meaning the company is moving from so-called “investment grade” to “high-yield” or “junk”. SBB’s short-term credit rating has been revised from A-3 to B.
Take several with you in case you fall out
S&P also rates the outlook as negative. It reflects the possibility of downgrading by one notch over the next six to twelve months if SBB does not secure sufficient financing to meet upcoming short-term financing obligations in the coming quarters.
In the assessment, S&P notes that the company must refinance bond loans totaling SEK 14 billion within the next 12 months, raising concerns about the company’s liquidity position.
The result of a downgrade is that it becomes more expensive and more difficult to obtain financing, which leads to a negative self-reinforcing effect on the heavily indebted company.
After Monday’s plunge, SBB stock is at a five-year low. The turmoil also extended to other real estate stocks: Balder fell nearly five percent, while Castellum fell nearly three percent.
Libertines in the short term
Investor Peter Hermannrod has been short on an SBB stake since January/February when the stock settled at around NOK 40. By shorting stocks, you can make money when the stock price goes down. Today, the SBB exchange rate stands at around nine kronor.
Hermannrod believes the share price is still too high.
– I do not intend to cover it right away, he says.
– SBB was a flagstaff factory where all the red flags were flying. Then the investor says that sooner or later he will probably hit a wall.
Investor Peter Hermannrod. (Photo: Gunnar Lehr)
He sits short for two reasons. First, Hermannrod believes that the return on real estate should have gone up more than people say when real interest rates have gone up so much. Real estate prices are believed to have fallen slightly. Secondly, ownership is cyclical, and the investor believes there will also be pressure on rent when you get into bad times.
– For the SBB specifically, there was an incredible amount of information that was poorly followed up. It is costly, he says, to be poor, for it is likely that now they have sold the good and are left with the bad.
– Should you send a thank you letter to S&P Global?
– Yes.
– How much did you earn?
– I can’t say that. Needless to say it was very good.
Children’s faith
PKH’s chief investment officer, Pål Ringholm, thinks it’s funny that the cuts are only coming now. speaking in general:
Rating agencies do not seem to be directly involved when it comes to the Swedish real estate market, because this has been going on for a long time. The stock market caught fire, and the credit markets caught fire. Then there are many people who don’t read the newspaper. There is always someone who tries to maintain their childlike faith and believe in innocence, says Ringholm.
Investment Director Pål Ringholm. (Photo: Per Thrana)
He warns that many Swedish real estate companies will be downgraded in the future, meaning capital is likely to become more expensive in a country where idleness was once thought to be the new normal.
In general, Ringholm expresses great interest in the Swedish real estate market.
– If one identifies a place where things can really go wrong, Sweden is an obvious candidate. The country has higher inflation than many emerging countries, and interest rates are likely to be even higher. The value of commercial property must also be adjusted, and this has not yet happened on paper. Not everyone believes it, but real estate can actually fall flat.
Death spiral
Director Tom Hastens at Norcelab has been concerned about the Swedish real estate sector for many years and has therefore steered clear of this part of the credit market.
– SBB has been one of the most challenging companies of all time. The company has tried to defend its investment grade position all along, and the downgrade has been priced in fairly, but now what happens is you get the actual confirmation with justification, he says.
According to Hestnes, this would trigger an automatic interest rate adjustment of 1.25 percentage points on bond debt, which would correspond to around NOK 300 million in increased interest costs next year. Hastens believes it will become a self-reinforcing vortex.
Director Tom Hastens at Norcellab. (Photo: Oyvind Elfsborg)
– I would call it the death spiral we’ve been waiting for. becomes self-realization. The company needs capital and has announced that it will raise capital, but stock D is now falling below the price the company was supposed to raise money for, he says, and continues:
The challenge is that SBB is a large player and central to a complex ownership structure. It is very difficult, if not impossible, to get a complete overview of a company, because there are so many liabilities and guarantees that lie off the balance sheet.
Real estate stocks fell broadly on Monday. Hestnes notes that real estate makes up 26 percent of the high interest market in the North, and financing costs have skyrocketed.
– SBB also has a large share of variable interest, but refinancing now at these levels in the future is not sustainable, to say the least. I think the bleeding should stop by cutting dividends immediately, but I also don’t rule out a complete restructuring of the company before it can attract much-needed fresh capital, says the director.(conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We’d like you to share our statuses using links that lead directly to our pages. Reproduction or other use of all or part of the Content may be made only with written permission or as permitted by law. For more terms see here.
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