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A Swedish Real Estate Mogul Has Bond Investors Very Worried

Love Liman and Charles Daly
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A Swedish Real Estate Mogul Has Bond Investors Very Worried

(Bloomberg) -- Bondholders in one of Sweden’s biggest property firms say they fear their investment might soon be labeled junk after learning of a criminal probe with wide-reaching ramifications.

The company in question is Samhallsbyggnadsbolaget i Norden AB, also known as SBB. Its chief executive, Ilija Batljan, was this week detained by police for questioning amid reports of insider trading tied to a recent acquisition. The news sent SBB’s share price and bonds plunging.

The episode has struck a nerve in a market already shaken by panic selling. Back in March, 35 credit funds slammed shut to halt a client exodus as the bond market tanked. Real estate bonds played a big role in the rout, and the financial watchdog has since signaled concern over the sector’s dominance in credit markets, following its conspicuous growth.

Batljan was released by police on Wednesday after answering questions on his adherence to Sweden’s Market Abuse Regulation. The country’s Economic Crime Authority says the investigation is ongoing, and that Batljan remains part of that probe. SBB’s board has said it has full confidence in its CEO, while Batljan himself has denied any wrongdoing.

But bondholders are now worried about what the ongoing case means for their investments.

Fredrik Tauson, a portfolio manager at Nordic Cross Asset Management AB who holds SBB’s hybrid debt, said that to protect its current long-term issuer ratings of BBB-, the company “has to reduce debt by selling assets in a deteriorating and unfavorable market.” The allegations against Batljan “won’t facilitate this process,” he said.

Since news broke of Batljan’s detention, yields on SBB’s most recently issued senior unsecured euro bonds jumped to 3.6%. The average yield for BB-rated European junk bonds is 4.5%, as measured by the Bloomberg Barclays Pan-European High Yield Index.

SBB isn’t trading “that far away from junk right now” Tauson said. “So a fallen angel event looks almost priced in already.”

Bloomberg spoke with three other SBB bondholders who voiced similar concerns, while asking not to be identified by name.

Danske Bank analyst Louis Landeman says there was already some concern over SBB’s divestment plan, knowing that it needs to sell assets worth over $1 billion to support its ratings. “If the market abuse allegations prove true, this will add to the already high uncertainty,” he said.

Last month, Fitch Ratings said SBB needs to sell 8 billion kronor ($800 million) of assets this year to maintain a rating that’s one notch above speculative grade.

Those divestments are a “key prerequisite for SBB’s current credit ratings,” Landeman said. “The CEO’s investigation ultimately weakens the company’s ability to safeguard its ratings from a downgrade to high-yield.”

On Friday Standard & Poor’s signaled the company’s BBB- ratings could be cut to junk once more is known “about the effect of these events on the company’s operations and financial credit metrics.”

The company however doesn’t expect the current situation to complicate the necessary reduction in its balance sheet, according to spokesman Adrian Westman. “Our goal is still to achieve and maintain a BBB+ rating within the next 12 months,” he said in emailed comments.

SBB has almost 4.3 billion euros in debt outstanding and has been a prolific issuer in both euros and Swedish kronor. In the first quarter alone it sold three euro bonds totaling 1.3 billion euros, including a hybrid note and a 20-year private placement.

But a number of SBB’s creditors aren’t allowed to hold junk-grade bonds, and would have to sell their investment if Standard & Poor’s and Fitch lowered their ratings on the company.

“The initial effect might be some forced selling in the senior unsecured bonds from mutual funds with strict investment-grade mandates,” Tauson said.

(Adds S&P details and comment from SBB’s spokesman)

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