by Teri Buhl
SBB creditors recently participated in a call hosted by attorneys from Cleary Gottlieb in an effort to gauge other bondholders’ interest in joining Fir Tree in making demands to accelerate their bonds over a interest coverage ratio covenant breach.
SBB is short for Samhällsbyggnadsbolaget i Norden AB. Sources say it’s too late for other parties to directly join Fir Tree’s lawsuit but the fund and its attorneys have an alternative plan.
Fir Tree, a US-based hedge fund, was the first and only creditor to litigate against SBB. It is represented by Cleary Gottlieb who filed a lawsuit in London’s commercial court last year seeking legal remedies and an accelerated bond repayment.
It holds $49 million principal across two EMTNs, Euro Medium Term Notes, namely the 0.75% €700m social bond due 14 December 2028 and the 1.125% €950m social bond due 26 November 2029 , according to the lawsuit filing.
The Contested Breach
SBB troubles began back in February 2022 when short-seller Viceroy Research issued a report alleging corporate governance issues, inflated LTV ratios and related-party transactions.
Then in June 2023 came news of the possible interest coverage ratio (ICR) breach. This was the result of changes to SBB’s accounting in its Q2 2023 earnings, which were first noticed by my former colleague Mary Pollack at CreditSights.
Moreover, I exclusively reported last year for LFI that SBB had published two sets of financials, unbeknownst to investors, in a move to present the company with financials that didn’t breach the covenant. An ICR measures a company’s ability to pay interest on its debt. It’s calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expense.
Joining The Fray
Bondholders started considering joining Fir Tree’s campaign this month after a hearing on disclosures, held on November 9 in London. The disclosure showed that Fir Tree had obtained internal SBB emails discussing how the company was aware of the possible breach after a third party lender brought it up on another smaller loan. The emails, which were disclosed in a Skeleton argument, allegedly showed SBB executives and its incoming CEO Leiv Synnes immediately began a plan to change its financials to cure the breach. Then when SBB’s own auditor saw what the company was planning they expressed their discomfort, according to court documents. But SBB moved forward anyway and allegedly changed its normal accounting practices which is now at the heart of the litigation.
According to multiple creditors who have spoken with Fir Tree’s law firm, the goal now is to set up a quasi new ad-hoc group comprised of like-minded bondholders who would agree to also make demands to the company to accelerate their bonds. If SBB agreed to settle then holders would split pro-rata funds from the settlement.
A current SBB bondholder told this reporter this week, “Right now most funds have been sitting back watching if Fir Tree will win its case because if so the company will go bust after holders call in their bonds.”
Fir Tree’s Ideal Settlement
Additionally, Fir Tree has presented SBB with a plan to refinance some of its debt. The plan involves a roll up of the existing notes at the SBB HoldCo level into loans at the operating company level along with providing new money financing. Ideally the plan would work so that the notes of any settling parties would be exchanged for new loans at the operating company. And the creditors who form this new ad-hoc group would have the chance to provide new money financing to the company. On top of that sources say longer dated noted holders could have a chance at a double-dip recovery.
How open SBB would be to the latest approach is questionable though.
According to sources SBB has been resistant to any new restructuring offers. Last year I reported at LFI multiple creditor groups formed (which included Blackrock, GoldenTree, and Anchorage) and tried a somewhat soft approach using advisors to make to make demands about creditors having a say in future asset sales but SBB held their ground and ignored the creditors leaving each group to disband. Since then SBB has continued to sell off good assets through joint ventures with companies like Brookfield. More recently it completed a spin-off IPO of its residential properties, the proceeds of which were earmarked to flow back to creditors. It’s also working on further sale of properties in Västerås and Flen per its Q3 presentation. But will that be enough?
SBB faces a huge maturity wall over the next few years. As of Q3 24, SBB owed SEK 54.7 billion ($5bn) of debt, of which SEK 5bn ($476.25 million) falls due in Q1 2025 and further SEK 41.3.5bn ($3.783 billion) of mainly unsecured debt maturing in 2026-2029.
According to the Q3 24 report, SBB had a meager SEK 1.8bn of available liquidity. That said post balance sheet date, the company has taken steps to improve that by signing a new SEK 2.5bn credit facility with a Scandinavian bank, receiving dividends from Sveafastigheter (the IPO-ed company) and carrying out further asset sales. SBB wouldn’t comment on its new cost of capital to secure the new RCF today when asked by analysts.
SBB is in dire need of new capital to address its liquidity problem but its ability to go out and raise it in the markets is currently limited, according to statements made by the company in its earnings calls this year and analyst reports. CEO Leiv Synnes has blamed the Fir Tree litigation for this and swore again today in its earnings call that Fir Tree’s claims are baseless and it will fight the suit through trial which begins the middle of January. On the other hand, sources close to the situation say, Fir Tree and its attorneys feel quite confident in their ability to succeed at trial even more so after witness statements and email disclosures have allegedly shown SBB’s leadership fiddle with its accounting to starve off the covenant breach.
Time’s Running Out
An additional problem is the compressed time schedule. Fir Tree case is under a short trial scheme – it is set to start in the week of 13 January 2025 and guided to end in March 2025 with a decision to come within 6 weeks of the trial ending. In the event that Fir Tree wins and a court says the company did breach a covenant, then any other bondholder could call in the bonds and SBB could be forced to pay billions overnight. If that happens, sources say it’s very likely SBB would be forced to file for reconstruction in Sweden, which is similar to a U.S. chapter 11.
Attorneys for SBB and Fir Tree did not respond for comment as of press time.
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