WEBVTT - Distressed Companies Dumping Assets; SBB Sinks 0:00:12.000 --> 0:00:15.040 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:15.280 --> 0:00:18.000 My name is James Crumbie. I'm a senior editor at Bloomberg. 0:00:18.480 --> 0:00:21.560 This week, we're very pleased to welcome it enly Garthia Pees, 0:00:21.640 --> 0:00:25.200 who covers distressed debt and also football for Bloomberg News 0:00:25.200 --> 0:00:27.000 in London. How are you, Renie? 0:00:27.600 --> 0:00:28.080 All good? 0:00:28.200 --> 0:00:29.000 Thank you? James. 0:00:29.360 --> 0:00:32.800 Ru also delighted to have Tolu Alamutu, who covers real 0:00:32.920 --> 0:00:36.559 estate and banks for Bloomberg Intelligence based in London. We'll 0:00:36.600 --> 0:00:38.360 be coming back to Tollu later in the show to 0:00:38.400 --> 0:00:41.879 talk about the crisis at SBB, the poster child for 0:00:41.920 --> 0:00:47.599 Sweden's property meltdown. But first it Garcia Pees with Bloomberg 0:00:47.680 --> 0:00:51.600 News traveled companies distress debt. Why are we seeing so 0:00:51.680 --> 0:00:52.800 much drama right now? 0:00:53.159 --> 0:00:56.520 Well, it's been a long time coming because a lot 0:00:56.520 --> 0:01:01.280 of companies accumulated a lot of debt during COVID times. 0:01:02.320 --> 0:01:07.199 Also some of them that had you know, big, big 0:01:07.520 --> 0:01:11.320 leverage because they were leveraged buyouts when that was cheap. 0:01:12.840 --> 0:01:16.760 Those kind of structures worked well while that was very cheap, 0:01:17.959 --> 0:01:23.280 not so much anymore, in particular when they face refinancings. 0:01:24.120 --> 0:01:28.800 So we are now starting to see the cracks showing 0:01:28.880 --> 0:01:35.040 up more often and higher interest rates is already hurting 0:01:35.080 --> 0:01:40.600 those that have floating dead, but also the ones that 0:01:40.680 --> 0:01:45.000 are trying to refinance. They know that it's going to 0:01:45.040 --> 0:01:51.080 be more expensive and in some cases just prohibitedly. So 0:01:51.120 --> 0:01:54.280 that's one and then the other thing is inflation, which 0:01:54.280 --> 0:01:57.440 of course it's also hurting. Not all the companies have 0:01:57.560 --> 0:02:02.000 the same pricing powers, so some have been able to 0:02:02.040 --> 0:02:07.040 pass through to consumers at least for most of last year, 0:02:08.760 --> 0:02:11.280 and others haven't. So we are also starting to see 0:02:11.919 --> 0:02:15.480 this disparity between borrowers of the ones that have this 0:02:16.000 --> 0:02:17.760 power and the ones that don't. 0:02:18.560 --> 0:02:20.920 So in basic terms, rates are going up. That means 0:02:20.960 --> 0:02:24.320 that debt service, you know, the cost of your debt increases. Also, 0:02:24.440 --> 0:02:28.359 the economy's slowing, so your earnings are going down. Consumption 0:02:28.480 --> 0:02:31.680 is probably suffering because of inflation across the world. But 0:02:32.360 --> 0:02:34.760 where are we in the cycle any Is it going 0:02:34.800 --> 0:02:35.639 to get worse from here? 0:02:36.680 --> 0:02:39.320 It does look like it's definitely going to get worse 0:02:39.360 --> 0:02:42.360 before it gets better. Part of the reason is because 0:02:42.360 --> 0:02:46.919 we're still seeing high levels of inflation, so central banks 0:02:46.960 --> 0:02:51.639 are not likely to lower rates anytime soon. And the 0:02:51.680 --> 0:02:54.640 other part of The reason is that we are coming 0:02:54.720 --> 0:02:59.600 from from an era where lenders or creditors in general, 0:02:59.720 --> 0:03:06.400 where keen on amending and extending the dead and wave covenance, 0:03:06.440 --> 0:03:10.480 et cetera, because they understood with COVID, they understood that 0:03:10.960 --> 0:03:13.560 most of the companies were in that situation for reasons 0:03:13.560 --> 0:03:18.120 that were outside of their control or had reasons that 0:03:18.200 --> 0:03:22.359 had little to do with their performance. Now that they 0:03:22.400 --> 0:03:25.400 are a lot of them are running out of passions 0:03:26.360 --> 0:03:29.160 in some cases, when you know, you've seen a lot 0:03:29.160 --> 0:03:31.760 of of the restructurings that we're seeing now actually are 0:03:32.440 --> 0:03:36.240 second time structurings. In some cases even third time companies 0:03:36.280 --> 0:03:40.120 that restructure during COVID, and that hasn't been enough because 0:03:40.400 --> 0:03:45.880 the business hasn't rebounded as strongly as expected. So they 0:03:46.040 --> 0:03:49.600 are coming back for a second or third round. 0:03:49.840 --> 0:03:52.040 So what kind of companies at most risks do you think? 0:03:52.040 --> 0:03:54.040 I mean, in the US, we've seen a lot of 0:03:54.040 --> 0:03:58.840 stress in retail and healthcare, and commercial real estate is 0:03:58.920 --> 0:04:00.880 under a lot of pressure as well. But what about 0:04:00.920 --> 0:04:03.960 in Europe? Is it the same kind of cast of characters, 0:04:04.000 --> 0:04:06.280 the same same same sectors that are in trouble. 0:04:06.880 --> 0:04:09.440 Yeah, it does look like it's it's very similar retail 0:04:09.480 --> 0:04:14.560 has been distressed for ages because of the change in 0:04:14.560 --> 0:04:18.960 in online shopping. It was a change of partying people 0:04:19.080 --> 0:04:24.240 not going to to shopping malls as often that that 0:04:24.400 --> 0:04:28.080 kind of of trend that was already the case before COVID, 0:04:28.120 --> 0:04:31.400 and of course with COVID things accelerated even further. And 0:04:31.440 --> 0:04:34.960 then for real estate it is now it's a sector 0:04:35.000 --> 0:04:38.920 that accumulated a lot of debt again when when it 0:04:39.000 --> 0:04:41.240 was cheap to do so. But now a lot of 0:04:41.240 --> 0:04:45.080 these structures are suffering because of property value going down 0:04:45.200 --> 0:04:47.320 also with the pandemic. In the case of the of 0:04:47.360 --> 0:04:52.480 the businesses that have offices, a lot of those are 0:04:52.520 --> 0:04:55.920 suffering because depending on the on the geographies, people are 0:04:55.960 --> 0:05:00.160 not going back to the office as often as for 0:05:00.839 --> 0:05:04.240 so not a lot of companies don't need the same 0:05:04.440 --> 0:05:06.880 office space that they used to. They need less, So 0:05:07.680 --> 0:05:12.000 landlords in that part of the market are are struggling. 0:05:12.160 --> 0:05:14.839 Depending on the on the countries, you do see more 0:05:15.279 --> 0:05:18.360 higher back vacancy rates in that part of the of 0:05:18.400 --> 0:05:22.560 the real estate market than in others. But but yeah, 0:05:22.640 --> 0:05:27.360 real estate companies are are suffering a lot with this 0:05:27.640 --> 0:05:35.320 combo of lower lower value of the properties plus higher rates. 0:05:35.480 --> 0:05:37.160 So the borrowers that are out there that are really 0:05:37.200 --> 0:05:39.359 struggling right now, but we think that they've got a future. 0:05:39.360 --> 0:05:41.800 They're not going to file for bankruptcy. What are they 0:05:41.800 --> 0:05:43.479 doing to relieve the pressure here? 0:05:44.440 --> 0:05:49.640 So we are seeing more and more companies that are 0:05:49.680 --> 0:05:53.719 trying to sell assets as a way to pay down debt, 0:05:53.960 --> 0:05:57.640 or they are that are announcing that they are doing 0:05:57.680 --> 0:06:01.640 reviews to sell assets to pay down that and for 0:06:01.760 --> 0:06:06.240 now it's non core assets. They're not selling the duels 0:06:06.320 --> 0:06:10.440 of the crowns or to speak, but they are starting 0:06:10.480 --> 0:06:15.320 to look into it, if not doing it already. One 0:06:15.640 --> 0:06:21.400 reason why there haven't been even more asset sales so 0:06:21.560 --> 0:06:28.039 far is because the mismatch in valuation in terms of 0:06:28.160 --> 0:06:30.840 what the sellers were hoping they would get for their 0:06:30.880 --> 0:06:35.200 assets and what the buyers want to pay for them. 0:06:35.720 --> 0:06:40.600 So the sellers that can hold to the asset are 0:06:40.680 --> 0:06:45.240 waiting for a better moment to sell it. But that's 0:06:45.320 --> 0:06:48.040 not the case for everyone. 0:06:48.200 --> 0:06:50.159 And you say they're not giving away the crown jewels, 0:06:50.279 --> 0:06:52.920 but are there any sort of being forced to sell 0:06:53.320 --> 0:06:56.440 assets or units that they really do need to keep 0:06:56.480 --> 0:06:58.640 in order to generate the cash that they'll need to 0:06:58.680 --> 0:07:02.200 stay alive over the long term. 0:07:01.440 --> 0:07:07.200 I think more than I mean perhaps Friends supermarket Casino 0:07:07.360 --> 0:07:11.080 is the best example. It's still holding to its its 0:07:11.560 --> 0:07:17.320 main business, which is Friends, but it did have a 0:07:17.360 --> 0:07:20.920 bigger stake in SAE, which is I think the third 0:07:21.000 --> 0:07:24.240 largest retailer in Brazil. That was a pretty good asset, 0:07:24.320 --> 0:07:27.120 but it had to sell part of those shares in 0:07:27.200 --> 0:07:32.680 order to raise money to to pay down debt. Again, 0:07:32.840 --> 0:07:35.360 it's holding to its core business, which is Friends, but 0:07:35.400 --> 0:07:37.760 it's also it also had to sell some of the 0:07:37.800 --> 0:07:42.280 businesses that were actually pretty good for its you know, 0:07:42.440 --> 0:07:47.160 existence so to speak. I guess what we are seeing 0:07:47.200 --> 0:07:50.280 more when it comes to that core part of the business. 0:07:50.280 --> 0:07:52.480 What we are seeing more is debt for equity swaps, 0:07:52.520 --> 0:07:55.960 so creditors to taking over the business because a private 0:07:56.000 --> 0:08:00.160 equity owner doesn't doesn't see a way forward for that 0:08:00.760 --> 0:08:04.160 for that company, so it's just giving up on it altogether. 0:08:04.480 --> 0:08:06.280 And on Casino, I mean, you've been all over that one. 0:08:06.320 --> 0:08:09.120 It's a really fascinating story. It's the biggest supermarket, one 0:08:09.120 --> 0:08:13.000 of the biggest supmarket chains in France, and so why 0:08:13.040 --> 0:08:15.320 is that one getting so much attention? What's the drama there? 0:08:16.120 --> 0:08:19.880 So it's a very interesting situation. It has been cooking 0:08:19.960 --> 0:08:20.800 for a long time. 0:08:21.560 --> 0:08:23.239 It was already. 0:08:24.680 --> 0:08:30.800 Short sellers had it on the radar many years ago. 0:08:30.920 --> 0:08:35.240 It started in twenty fifteen, and then in twenty eighteen 0:08:35.600 --> 0:08:39.200 the main accuisition of short sellers was that the company 0:08:39.200 --> 0:08:43.000 actually had more debt that it was reporting because of 0:08:43.040 --> 0:08:48.160 the way it was consolidating different assets in its portfolio 0:08:49.000 --> 0:08:52.560 in the group. And then from twenty eighteen the company 0:08:53.559 --> 0:08:56.960 compromised medias announcement that it was going to sell assets 0:08:57.000 --> 0:09:00.320 to reduce the debt because it was overlabored and it 0:09:00.400 --> 0:09:06.400 was doing so. But definitely COVID didn't help in terms 0:09:06.840 --> 0:09:10.400 of valuations and in terms of the calendar to some extent. 0:09:10.600 --> 0:09:15.960 And also now it's got to a point where even 0:09:16.000 --> 0:09:18.319 after selling a lot of assets just in time to 0:09:18.720 --> 0:09:23.520 pay the next the dead that was the next maturity, 0:09:24.840 --> 0:09:26.800 it not has come to a point where it has 0:09:26.840 --> 0:09:31.440 to restructure and it has started talks with creditors and 0:09:31.480 --> 0:09:36.800 other stakeholders to decide how it's best to restructure the 0:09:36.840 --> 0:09:40.840 company for the business. It's also very interesting. It's also 0:09:40.880 --> 0:09:44.559 a very interesting case because it's for the French government. 0:09:44.640 --> 0:09:48.240 It's a very important asset because it employs over fifty 0:09:48.320 --> 0:09:52.040 thousand people in France, and it's also critical for feit 0:09:52.120 --> 0:09:56.319 security in some of the French regions. It's very important 0:09:56.400 --> 0:09:59.920 in Paris, for instance, in the Paris region, it's important 0:10:00.040 --> 0:10:02.800 in the Lyon region as well, and in the south 0:10:02.840 --> 0:10:05.600 of France. So of course for the French government it's 0:10:05.600 --> 0:10:08.040 a very it's a very important asset and also it's 0:10:08.080 --> 0:10:12.240 interesting and it has a massive capital structure. It's about 0:10:13.040 --> 0:10:18.480 seven billion of debt, so a lot of creditors involved, 0:10:18.720 --> 0:10:22.480 a lot of suppliers involved, and it also has very 0:10:22.480 --> 0:10:28.920 interesting characters involved in terms of well the chairman of 0:10:28.960 --> 0:10:33.959 the company is a very interesting character, but also Jean, 0:10:34.800 --> 0:10:39.200 but also different parties that have made offers for the 0:10:39.240 --> 0:10:44.840 company to inject equity. If you know, the company managed 0:10:44.880 --> 0:10:49.200 to cut debt to sustainable levels. We have a check 0:10:49.280 --> 0:10:53.840 billionaire called Daniel Kratinsky that has made such an offer, 0:10:54.240 --> 0:10:57.240 teaming up with an existing shareholder of the company. And 0:10:57.240 --> 0:11:00.440 we also have a tree of French businessmen that have 0:11:00.600 --> 0:11:04.120 done a separate bit for it. And Lastie is interesting 0:11:04.160 --> 0:11:08.120 because of the implications he may have in the French 0:11:09.520 --> 0:11:13.840 food retail industry in general. Because O'shan, for instance, has 0:11:13.880 --> 0:11:18.200 already approached Kratinski to team up if he's bid wins 0:11:18.320 --> 0:11:25.760 after the restructuring, and Carfu has expressed interest in the 0:11:25.800 --> 0:11:30.560 past for some of the assets. The company has already 0:11:30.600 --> 0:11:34.760 agreed to sell some some of the some of its 0:11:34.760 --> 0:11:40.440 sites to Antarache. It's another French retailer, so there is 0:11:41.640 --> 0:11:45.040 a lot of interest for the assets in France, so 0:11:45.080 --> 0:11:47.120 it will be it will be interesting to see how 0:11:47.160 --> 0:11:49.240 it plays out after the restructuring. 0:11:49.920 --> 0:11:52.400 Sounds like a fascinating story with It's like a Shakespeare 0:11:52.440 --> 0:11:56.160 in drama. What what scene? What actor we in the drama? 0:11:57.000 --> 0:11:58.960 Is it act three? Scene one? Or are we getting 0:11:58.960 --> 0:12:00.400 towards the end of the two? No more? 0:12:00.880 --> 0:12:03.400 Oh no, we're nowhere near the end. Because they just 0:12:03.640 --> 0:12:09.800 entered conciliation laid may May twenty fifth, so they have 0:12:09.960 --> 0:12:15.240 until October twenty fifth to negotiate the restructuring. Ideally they 0:12:15.240 --> 0:12:19.079 would like to have it earlier, of course, because it's 0:12:19.120 --> 0:12:24.400 also listed companies, so the earlier the better. And also 0:12:24.440 --> 0:12:30.800 summer is typically a very bad quarter for supermarkets in 0:12:30.880 --> 0:12:33.320 terms of liquidity because they need to do all the 0:12:33.360 --> 0:12:38.959 purchases for them for the Christmas season, so they need 0:12:38.960 --> 0:12:45.600 to stock basically, so Yeah, we were starting the talks 0:12:45.720 --> 0:12:48.200 of the restructuring and after that they will have to 0:12:48.240 --> 0:12:53.320 go to accord to validate the agreement, vote on etc. 0:12:55.640 --> 0:12:58.360 But yeah, we're starting. 0:12:59.520 --> 0:13:02.360 Okay. Interesting. So just going back to the asset sales generally, 0:13:02.400 --> 0:13:05.440 I mean, you're talking about European asset sales to support 0:13:05.480 --> 0:13:08.520 companies through difficult times. Is it confined to Europe orre 0:13:08.520 --> 0:13:09.880 you seeing it in other parts of the world. 0:13:10.520 --> 0:13:13.320 We are seeing it in other parts of the world 0:13:13.360 --> 0:13:17.000 as well. In the in the US, we've seen different 0:13:17.000 --> 0:13:19.800 cases and there was also a poll by EY that 0:13:20.240 --> 0:13:24.199 mentioned that in the US there were about forty four 0:13:24.240 --> 0:13:28.319 percent of chief executive officers that are planning to the 0:13:28.360 --> 0:13:34.080 investments this year. And we have already seen in Chapter eleven, 0:13:34.120 --> 0:13:37.280 although of course you can say Chapter eleven is the 0:13:37.320 --> 0:13:40.600 place you want to avoid if you can. But we 0:13:40.640 --> 0:13:43.920 are seeing examples of companies that Genesis Care, for instance, 0:13:44.160 --> 0:13:47.120 is an example. It's in the healthcare space. It has 0:13:47.160 --> 0:13:50.840 businesses in Australia, in Europe and in the US, but 0:13:50.880 --> 0:13:54.120 the US one is the one that wasn't working and 0:13:54.160 --> 0:14:00.480 that was dragging performance in general. So eventually they put 0:14:00.480 --> 0:14:03.120 the police a company in they file for Chapter eleven 0:14:03.320 --> 0:14:05.960 and they are announced that they are planning to sell 0:14:06.120 --> 0:14:11.520 the US business. But again that one's as part of 0:14:11.559 --> 0:14:14.040 the chapter eleven situation. 0:14:14.440 --> 0:14:16.680 Right, got it. So basically, these companies that are trying 0:14:16.720 --> 0:14:19.720 to sell assets they think are worth more than the 0:14:19.760 --> 0:14:22.520 market is willing to pay. At the same time rates 0:14:22.520 --> 0:14:24.680 are going up and the economy is slowing. It all 0:14:24.720 --> 0:14:28.080 sounds like a recipe for disaster. It seems going to 0:14:28.080 --> 0:14:28.600 get worse. 0:14:28.880 --> 0:14:33.720 Yeah, it is complicated because, for instance, or Pea, which 0:14:33.800 --> 0:14:39.640 is a French care home operator, it had to restructure 0:14:39.840 --> 0:14:42.840 twice last year. And part of the reason for that 0:14:43.240 --> 0:14:47.080 was that in the first restructuring it made a deal 0:14:47.120 --> 0:14:49.880 with the French banks, but it also was planning to 0:14:49.960 --> 0:14:53.280 sell a lot of assets to cut down that. But 0:14:53.320 --> 0:14:58.040 then because of the valuations, it realized, well, if we 0:14:58.120 --> 0:15:02.600 do this now, it's we're going to get paid less 0:15:02.720 --> 0:15:05.800 than we think they're worth. So it's better if we 0:15:05.840 --> 0:15:09.040 do a broader structuring and then we sell the assets 0:15:09.120 --> 0:15:11.280 as we see fit. The other thing is that when 0:15:11.920 --> 0:15:17.760 everyone in the market knows or thinks you have problems, 0:15:18.320 --> 0:15:20.800 of course the price that they're willing to pay for 0:15:20.840 --> 0:15:25.480 those assets are not necessarily the best or fair value 0:15:25.680 --> 0:15:29.400 or what you could get if they thought your situation 0:15:29.640 --> 0:15:33.840 was more stable. And that's something that SBB, for instance, 0:15:33.920 --> 0:15:35.960 is facing. That they announced they were planning to do 0:15:36.520 --> 0:15:41.640 asset sales, but then the new management was very clear. 0:15:42.120 --> 0:15:44.200 Now it remains a question on whether they will be 0:15:44.240 --> 0:15:46.480 able to stick to the plan, but that they don't 0:15:46.520 --> 0:15:50.960 want to do fire sales, so that they will try 0:15:51.000 --> 0:15:53.080 to sell them, that there are a lot of parties 0:15:53.120 --> 0:15:56.480 interested in their assets, and so that they will do 0:15:56.520 --> 0:16:00.480 them as they see fit, slowly but surely. Slowly will 0:16:00.480 --> 0:16:02.720 depend I guess on the offers that they get, but 0:16:02.760 --> 0:16:06.479 they don't. They're not planning to sell at deep discounts. 0:16:07.000 --> 0:16:09.120 So just to be clear, you're talking about SBB there 0:16:09.120 --> 0:16:12.800 from Sweden, right correct? Yeah, okay, great, we all get 0:16:12.840 --> 0:16:15.000 to catch up with Tolu al Mutu in the moment 0:16:15.360 --> 0:16:18.800 from Bloomberg intalience about that, but before we do, only 0:16:18.840 --> 0:16:20.920 what's the next big story to watch on your beat? 0:16:20.920 --> 0:16:25.040 Are there any big football scoops out there coming? That's 0:16:25.440 --> 0:16:27.720 soccer for our US listeners. 0:16:27.400 --> 0:16:31.480 It is. It is getting busy. That's busy. It's definitely 0:16:31.480 --> 0:16:34.360 getting busy. I guess in that front, we're all watching 0:16:34.400 --> 0:16:37.560 what happens with the Italian League if they're going to 0:16:37.640 --> 0:16:42.040 sell their broadcasting rights the same well revenue from their 0:16:42.080 --> 0:16:44.320 broadcasting rights the same way that the Spanish and the 0:16:44.320 --> 0:16:47.840 French league did. And also any any clubs that are 0:16:47.880 --> 0:16:54.040 potentially for sale, that's something we're always looking for. And 0:16:54.080 --> 0:16:58.359 then in the stress, Yeah, it's it's a matter to see, 0:16:58.840 --> 0:17:03.560 well what what the owners of the companies are going 0:17:03.600 --> 0:17:05.760 to do, if they're willing to inject more money in 0:17:05.800 --> 0:17:08.959 their companies, or if they will give up and just 0:17:09.000 --> 0:17:11.040 hand the cues to creators, and to what extent we 0:17:11.080 --> 0:17:15.560 will see like real fights or it will be you know, 0:17:16.000 --> 0:17:17.720 less less aggressive. 0:17:19.080 --> 0:17:22.440 Great stuff. Gartha Perez with Bloomberg News, thanks so much 0:17:22.480 --> 0:17:25.560 for joining us. Thank you for having me read all 0:17:25.560 --> 0:17:27.879 of it and is great scoops on the Bloomberg terminal 0:17:27.960 --> 0:17:30.720 and of course at Bloomberg dot com. So, as I 0:17:30.720 --> 0:17:33.639 mentioned earlier, we're very pleased to have with us. Tolu Alamutu, 0:17:33.640 --> 0:17:36.200 who looks at real estate and banks for Bloomberg Intelligence 0:17:36.280 --> 0:17:39.040 based in London. What's going on in real estate toler 0:17:39.119 --> 0:17:41.360 It seems like nothing but bad news when it comes 0:17:41.359 --> 0:17:44.280 to offices with not enough people going back to work. 0:17:44.280 --> 0:17:45.080 After the pandemic. 0:17:46.359 --> 0:17:50.920 Well, it definitely seems like that from where we're sitting 0:17:51.080 --> 0:17:56.119 in London. Not only are you seeing some of the 0:17:56.160 --> 0:18:01.879 real estate issuers report negative valuation adjustments, but you're seeing 0:18:01.920 --> 0:18:05.920 that result in losses at some of the companies. You're 0:18:05.960 --> 0:18:12.080 also seeing negative actions from the rating agencies, and you're 0:18:12.119 --> 0:18:15.199 not seeing the supply that you would have expected in 0:18:15.240 --> 0:18:18.200 the bond markets from these issues. So there's concerned about 0:18:18.200 --> 0:18:24.520 financing as well. So a lot going on and the 0:18:24.600 --> 0:18:28.439 concerns are not going away. It seems I think, you know, 0:18:28.560 --> 0:18:31.200 looking forward to the second half of the many of 0:18:31.240 --> 0:18:35.080 the issues that people had earlier in the year are 0:18:35.119 --> 0:18:37.760 going to carry through to that period unfortunately. 0:18:38.320 --> 0:18:41.680 So let's talk about SBB. It's the landlord at the 0:18:41.720 --> 0:18:44.679 center of Sweden's property crisis, which is wearying a lot 0:18:44.680 --> 0:18:47.680 of people, especially in Europe. They loaded up on cheap 0:18:47.720 --> 0:18:50.720 debt to snap up schools and healthcare centers that local 0:18:50.800 --> 0:18:54.200 governments were looking to offload. Now they're facing off against 0:18:54.200 --> 0:18:58.040 local councils who want the properties back. That sorry. They 0:18:58.080 --> 0:19:01.080 recently postponed dividend payment for at least a year to 0:19:01.119 --> 0:19:04.160 try and ease a funding crunch caused by sharply higher 0:19:04.200 --> 0:19:06.919 interest rates. And we know that SPB has about eight 0:19:07.000 --> 0:19:09.520 billion dollars in debt, So what is the situation TOALU, 0:19:09.760 --> 0:19:11.600 how bad is it going to get? Do you think? 0:19:12.880 --> 0:19:17.399 Okay? Well, SPB is being seen as I guess you know, 0:19:18.240 --> 0:19:20.439 the canary and the coal mine in some ways in 0:19:20.480 --> 0:19:24.119 some ways, and there are a number of reasons for that. First, 0:19:24.200 --> 0:19:27.800 they've been under pressure since at least the early part 0:19:27.920 --> 0:19:31.160 of i'd say last year because there was a short 0:19:31.160 --> 0:19:37.440 Sellar report that targeted them. And since then, SBB has 0:19:37.520 --> 0:19:41.720 done a number of things, including a spin off, including 0:19:41.840 --> 0:19:48.200 changing some of its reporting to include some alternative reporting measures. 0:19:48.440 --> 0:19:52.040 They've also carried out some asset sales, but none of 0:19:52.080 --> 0:19:58.360 this has really worked. And most recently they got downgraded 0:19:58.520 --> 0:20:03.360 by Pitch, SM and Scope, so they lost their investment 0:20:03.400 --> 0:20:07.000 grade ratings at S and P and Fitch and a Scope. 0:20:07.040 --> 0:20:11.280 There is a possibility of a further downgrade and as 0:20:11.280 --> 0:20:13.400 a result of the S and P downgrade, as you mentioned, 0:20:13.640 --> 0:20:18.400 they decided to skip the dividend. They also postponed a 0:20:18.480 --> 0:20:23.960 rights issue with SBB. It's basically at a point where 0:20:24.560 --> 0:20:27.480 we're getting at least one headline or one story a day. 0:20:28.400 --> 0:20:35.719 So yesterday we had a story about them converting a 0:20:35.800 --> 0:20:39.720 mandatory convertible of about I think two billion krona or 0:20:39.760 --> 0:20:43.480 so into shares, which I think would have been expected. 0:20:43.960 --> 0:20:48.840 And today we had the pleasure of a headline saying 0:20:49.040 --> 0:20:55.840 that the Swedish FSA will be probing SBB's accounting, primarily 0:20:55.880 --> 0:20:59.040 focused on the twenty twenty one reporting, but also potentially 0:20:59.080 --> 0:21:03.880 twenty twenty and SBB has has responded to that sorry, 0:21:04.280 --> 0:21:10.240 saying that in their view the valuations and other metrics 0:21:10.240 --> 0:21:12.879 that they reported are correct and they're looking forward to 0:21:12.920 --> 0:21:17.520 having a constructive dialogue with the Swedish FSA. The problem 0:21:17.600 --> 0:21:21.199 from a bondholder perspective is clearly the headline risk is 0:21:21.240 --> 0:21:27.560 extremely elevated at this point on SBB, and every day 0:21:27.600 --> 0:21:31.560 the headlines that we're getting and not particularly encouraging. In 0:21:31.640 --> 0:21:35.400 the meantime, we are waiting for the outcome of what 0:21:35.520 --> 0:21:41.639 SBB is calling a broad broader strategic review, which is 0:21:41.680 --> 0:21:44.199 supposed to look at whether they should sell all or 0:21:44.240 --> 0:21:47.880 some of their assets and so on, and I think 0:21:47.920 --> 0:21:52.480 what this probe from the FSA does is increase the 0:21:52.520 --> 0:21:54.919 urgency of them completing that review. 0:21:55.400 --> 0:21:57.520 And as you say, they were cut to junk in May, 0:21:58.080 --> 0:22:00.399 and since then the share price has dropped very deeply. 0:22:00.720 --> 0:22:03.720 Now hedge funds and rival landlords are circling the trebled 0:22:03.760 --> 0:22:07.639 company's holdings. You mentioned, you know, we're kind of getting 0:22:07.680 --> 0:22:11.240 this bad headline to day. What exactly we're looking for next? 0:22:11.280 --> 0:22:14.480 Is there a deadline on the horizon that we're trying 0:22:14.520 --> 0:22:18.119 to you know, focus on and what could happen next? 0:22:19.480 --> 0:22:24.280 So there are to me every day it seems like 0:22:25.040 --> 0:22:27.119 a deadline at the at the moment because of the 0:22:28.920 --> 0:22:31.119 level of headlines that we're getting, all the amount of 0:22:31.400 --> 0:22:35.399 headlines that we're getting. But there is one date that 0:22:35.480 --> 0:22:39.120 people are focusing on at the moment, and that is 0:22:39.760 --> 0:22:42.480 towards the end of this month, I think around twenty 0:22:42.600 --> 0:22:46.159 ninth of this month. The reason for that is that 0:22:47.640 --> 0:22:51.920 according to a report, there are bondholders that have written 0:22:51.920 --> 0:22:55.960 a letter to SBB stating that they have reached an 0:22:55.960 --> 0:23:02.959 interest coverage ratio covenant and SBB has i think ninety 0:23:03.040 --> 0:23:07.199 days to respond to that or to remedy that. SBB 0:23:07.359 --> 0:23:12.520 has already publicly said that they meet the covenants or 0:23:12.560 --> 0:23:17.000 the covenants under their Euroborn documentation. At least that's what 0:23:17.040 --> 0:23:19.280 we know in terms of what they said publicly. We 0:23:19.320 --> 0:23:23.040 don't know whether there's been any bilateral negotiations between them 0:23:23.359 --> 0:23:27.679 and this bondholder group, but if the report of the 0:23:27.680 --> 0:23:31.520 bondholder action is correct, then I guess the bondholders will 0:23:31.760 --> 0:23:35.320 expect some action from SBB before the end of this month. 0:23:36.280 --> 0:23:41.159 Having said that, there is another bondholder group that's on 0:23:41.200 --> 0:23:44.320 the other side of that argument that's stating that SBB 0:23:44.440 --> 0:23:49.560 actually has not reached that covenant, and I think one 0:23:49.560 --> 0:23:53.200 can understand why there would be players on that side 0:23:53.240 --> 0:23:59.879 as well. That's because if SBB were forced to in 0:24:00.200 --> 0:24:04.359 default at this point, that would obviously potentially mean that 0:24:04.400 --> 0:24:07.560 they'd have to pay off all the debt that they 0:24:07.640 --> 0:24:09.959 have or the senior debt that they have, and they 0:24:09.960 --> 0:24:12.479 don't necessarily have the cash on hand to do that. 0:24:13.920 --> 0:24:17.320 So the outcome for the bondholders may not be positive 0:24:17.400 --> 0:24:20.359 if they were to precipitate a default at this point. 0:24:20.720 --> 0:24:22.439 And is that the base case right now, that they 0:24:22.480 --> 0:24:25.159 will default on the debt and there will be a restructuring. 0:24:26.760 --> 0:24:32.199 I wouldn't say so. I think that there is still hope. 0:24:32.359 --> 0:24:37.160 I guess that some kind of resolution can be reached 0:24:37.200 --> 0:24:43.480 and that there will be progress with the broader strategic 0:24:43.520 --> 0:24:47.880 review and that there will be some way to appease 0:24:47.960 --> 0:24:52.480 these bondholders that have raised concerns. I should say that 0:24:52.520 --> 0:24:55.880 the issue is all around definitions and so on, and 0:24:57.480 --> 0:25:01.880 it's the definitions of the interest coverageeration that of its 0:25:01.880 --> 0:25:06.840 obviously have come into focus in this instance. The problem 0:25:06.960 --> 0:25:10.240 is there are many ways that one, I guess, can 0:25:10.720 --> 0:25:15.720 calculate that, and I guess SBB is justifying its own calculation. 0:25:16.119 --> 0:25:20.919 The bondholders will be justifying their own. The issue with 0:25:21.200 --> 0:25:27.400 SBB is that they restated their Q one results, and 0:25:28.000 --> 0:25:32.120 restatements are never could right, and the restatement didn't contain 0:25:32.200 --> 0:25:37.560 as much information as the initial reporting, and I think 0:25:37.640 --> 0:25:42.320 that's also added to the worry basically, and is one 0:25:42.320 --> 0:25:45.119 of the reasons I guess why you're seeing this bondholder action. 0:25:45.480 --> 0:25:47.439 But in a worst case scenario, which we have to 0:25:47.480 --> 0:25:49.560 be kind of always looking out for, what do we 0:25:49.600 --> 0:25:51.399 think recoveries might look like. 0:25:54.040 --> 0:26:00.479 That's a tricky fun because what normally well, these are 0:26:00.480 --> 0:26:07.600 never normal circumstances. What can happen in these disorderly situations 0:26:08.080 --> 0:26:12.320 is that the amount of secured that the people that 0:26:12.400 --> 0:26:16.280 maybe was reported was last reported might be higher, the 0:26:16.359 --> 0:26:20.320 valuations that they get for the properties might be lower 0:26:20.320 --> 0:26:24.959 than was last reported, and so as an unsecured bondholder, 0:26:25.880 --> 0:26:29.760 which all these people would be, you end up in 0:26:29.760 --> 0:26:34.800