Ilija Batljan is at the cutting edge of the refinancing challenge in Sweden’s real estate market.
The chief executive of Samhällsbyggnadsbolaget – better known as SBB – the residential and social infrastructure company he founded in 2016, is currently working to pay down SKr10 billion (€879 million) of bond debt over the next two years to strengthen its credit rating and regain market confidence after its share price fell by three-quarters during 2022 owing to concerns over its debt obligations.
So far, SBB has successfully refinanced SKr11.6 billion – a combination of bond and bank debt – during the first quarter of the year. The debt was refinanced through new loans from Nordic banks, in the US private placement market, with €500 million in bond buybacks and by raising cash by selling assets. Despite its growing catalogue of financing sources, alternative debt funds are not included in SBB’s strategy.
“Debt funds will never get foothold in the market. They are constantly hoping every time there is a crisis, that they can establish here. But they are too expensive and property companies in the region don’t want to have collateral with people that they don’t have a relationship with,” Batljan told Real Estate Capital Europe from the Stockholm headquarters of the Nasdaq Nordic-listed company.
But it is little wonder would-be alternative debt providers are optimistic this could be their moment. Sweden’s financial supervisory body, Finansinspektionen, has warned the credit risk in the country’s banks to commercial real estate was of “prime concern”, forecasting that high inflation and rising interest rates could bring a “time of reckoning” that would test the resilience of bank lenders. Real estate is, according to Swiss banking group UBS, the largest single sector exposure for the six biggest Nordic lenders: Nordea, Danske Bank, DNB, SEB, Handelsbanken and Swedbank.
A paper from rating agency S&P Global in March suggested banks’ presence could shrivel. S&P predicted Nordic banks’ loan loss provisions would triple in 2023 as macroeconomic challenges weighed on their commercial real estate exposures.
However, Batljan, awarded Sweden’s entrepreneur of the year by professional services firm EY in 2022, does not sense a cooling of bank lender interest in SBB, the core business of which is long-term ownership of secure inflation-protected cashflows from property management of social infrastructure in the Nordic region. It also owns assets which benefit from stable regulated Swedish tenancies with low rents.
During the first quarter of this year, the company completed an SKr11.6 billion financing, with SKr8.2 billion comprising of refinancing from four unnamed Nordic bank lenders, in addition to new capital.
Despite not borrowing from debt funds, Batljan does see a role for insurance companies in providing long-term debt capital directly to real estate companies.
“The largest share of the [refinancing] capital came from the banks, alongside a direct loan with an institutional insurance lender,” said Batljan. Insurance company lenders, he believes, are another type of provider seeking to grow their presence in the region.
But regardless of the growing appetite from insurers, he does not foresee this eating into the dominance of the banks: “The Nordic banks are working harder than ever. They know and they understand the real estate market. They have a strong financial position, and they are making more money than a year ago. Yes, the margins are slightly higher than before, but this type of debt is still competitive.”
As much as SBB is reliant on bank lending today, more than half of its debt liabilities are accounted for by unsecured bonds, with SKr2.2 billion approaching maturity in 2023, and SKr7.3 billion requiring refinancing in 2024. But Batljan is hopeful that, alongside bank lending, the Swedish and European bond markets, which he describes as having been “frozen” will soon be viable financing options.
“We see the bond markets starting to open up and the pricing of our bonds improving every day,” he told shareholders in February. “Our bond maturity over the next 12 months is approximately SKr3.8 billion, and the first SKr1.6 billion was repaid in the first quarter. However, we expect to make new financing on the bond market already this year.”
SBB will also, he said, continue to seek financing from the US private placement market. Last July, it made its first unsecured US private placement of $100 million over five and 10 years – a transaction, he says, is a further step in the company’s efforts to diversify its funding sources and demonstrates SBB’s strength in the global capital market.
It is a source of capital Batljan believes will be important in the next 12 months, saying SBB would “continue to work with our relationships in the USPP market,” adding: “Alongside stabilising the balance sheet by selling more assets, we think is the most efficient thing to do.”