A Yugoslav war refugee turned Swedish property tycoon is fast running out of options to stabilize his $13 billion empire, and the outcome will have ripple effects across Europe’s real estate industry.
Ilija Batljan started amassing a portfolio of more than 2,000 properties in 2016, buying up social housing and municipal buildings from cash-strapped authorities and leasing them back. The idea was to combine steady growth with stable returns provided by reliable, long-term tenants — but the reality was an appetite for debt that was too much for the Swedish market.
His company Samhallsbyggnadsbolaget i Norden AB — better known as SBB — is now teetering after a downgrade to junk status and time is running short to tame an $8 billion debt pile. The 55-year-old’s narrowing list of choices are all difficult: raise capital at severely discounted levels; divest properties at fire-sale prices and put valuations at risk; or sell a stake in the company he built from scratch to an outside investor.
Like numerous other landlords across Europe, SBB borrowed heavily from investors eager for yield in an era of ultra-low interest rates. What sets the company apart is the scale of the borrowing and its exposure to Sweden — home to one of the world’s worst property routs. That means it faces restructuring pressure sooner than peers, making SBB a potential harbinger of things to come.
Facing a 20% slump in housing prices, Sweden’s residential market is at the leading edge of the the region’s unfolding real estate crisis. It’s also crippling activity in the commercial sector, where the country’s landlords must roll over $40.8 billion of debt over the next five years, a quarter of which falls due this year. But with bond yields, and hence borrowing costs, climbing to unaffordable levels, traditional refinancing routes for low-rated companies have all but closed.
“These things often start with a local fire that is deemed not to be a systemic threat, but then it spreads fast as lightning to become a giant problem,” Per Jansson, deputy governor of Sweden’s Riksbank, said at a seminar in Stockholm on Wednesday. “We have to track this closely.”
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As SBB’s founder, chief executive officer and dominant shareholder, Batljan is at the center of the turmoil. Tension is building ahead of an extraordinary general meeting to approve emergency cash-savings measures on June 14, and the outspoken entrepreneur will be under pressure to present a credible path forward.
“He will have to answer for historical statements about how stable and steady the company is,” said Sverre Linton, legal counsel for the Swedish Shareholders’ Association. “A cult has been built around him and SBB. But now the halo is a bit askew.”
With the shares 90% below their peak and bonds trading at heavily distressed levels, Batljan has to move fast to restore confidence, and there’s less room to maneuver. The Stockholm-based company abandoned a plan to issue 2.6 billion kronor ($245 million) in new shares after the stock tumbled to less than half of the subscription price in the aftermath of the May 8 downgrade by S&P Global Ratings.
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The move was a major blow. It increased SBB’s financing costs by 285 million kronor — equivalent to 13% of last year’s cash flow. It also showed Batljan was out of touch. Just days before the downgrade, he had boasted that SBB met “all the criteria” to have S&P drop its negative outlook.
“The level of the credit rating has been the basis for the company’s business model,” said Louis Landeman, a credit analyst at Danske Bank. “The rapid expansion would not have been possible if it didn’t have this rating.”
In building his empire, Batljan’s bravado and a pledge to increase dividends for “100 years” wooed a loyal following of retail investors. Support has faltered because of the tumbling share price and his credibility suffered again after SBB proposed to postpone the promised payout following the downgrade.
Read More: SBB Dividend Pause Puts Pressure on CEO Company’s Bonds
In addition to conserving cash, SBB has raised funds, selling a stake in real estate developer JM AB for 2.8 billion kronor. Batljan said the transaction “enables a focus on the company’s core business and a further strengthening of SBB’s financial position.”
For a man anointed Sweden’s Entrepreneur of the Year in 2021 by SBB’s accountant EY, things have soured quickly. He’s been conspicuous by his absence from the public sphere in recent weeks, and SBB’s representatives didn’t respond to requests for comment for this story.
A Mogul’s Rise
Batljan’s journey to property kingpin started in Montenegro. To escape wars in the Balkans, he moved to Sweden in 1993 and quickly integrated, graduating with an economics degree from Stockholm University and later earning a doctorate in demographics and planning for elderly care.
In the early 2000s, he entered local politics and rose through the ranks of Sweden’s Social Democrats to become mayor in the seaside town of Nynashamn and then vice chair for the county council of Stockholm. Public service was an important stepping stone into real estate, giving him key connections and insight into local finances.
After his party’s defeat in the 2010 general election, Batljan chose not to serve in the opposition. A year later, he took his first step into property management by becoming deputy CEO of Rikshem AB, a real estate firm owned by pension funds. During his rocky four-year tenure, Batljan and Rikshem’s CEO were criticized for generous compensation tied to convertible loans. He was fired in 2015 over claims he engaged in personal acquisitions on the side without informing the board — a probe subsequently cleared him of most allegations.
In the spring of 2016, Batljan founded SBB and the firm soon acquired a care home for the elderly in southern Sweden. The company quickly became a specialist in sale-leaseback agreements. Municipalities would get cash, while SBB would get a revenue stream and an asset on its balance sheet, giving it the opportunity to borrow more money. The nursing home would serve as a template for hundreds of subsequent deals.
“What we invest in are the world’s safest assets,” Batljan said a few months after the company’s initial purchase. “The Nordic welfare states are the safest counterparties you can have.”
By early 2022, the formula was working so well that SBB added properties in Norway, Finland and Denmark and assets swelled to nearly 160 billion Swedish kronor. Its growing resources fueled a spate of acquisitions — the biggest being the $2.4 billion takeover of Hemfosa Fastigheter AB in 2019. Before interest rates started rising last year, the target was to roughly double the portfolio to 300 billion kronor by 2026.
Change of Fortune
Trouble started to surface early last year when short-seller Fraser Perring’s Viceroy Research LLC issued a series of scathing reports raising questions about the landlord’s finances. Batljan fired back, alleging criminal intent. In a sign of how personal the issue was, he used the birth of a grandchild in October as an opportunity to call short-sellers “parasites.”
Read More: Sweden’s Big Short Signals Trouble for European Real Estate
The fuel for SBB’s stunning growth was investment-grade debt. Over a three-year period starting in 2019, the company sold $7 billion worth of bonds, making it one of the most prolific issuers in Europe at the time. Having grown too big for the domestic krona market, it increasingly sold notes in euros. In 2021, 93% of its $1.9 billion issuance was in the currency — exposing SBB to risks from the slumping krona in the process.
The glut of new issuance also included extensive use of hybrid bonds — subordinated notes with very long or no maturities. They get favorable treatment from ratings agencies when calculating debt ratios, but along with instruments such as total return swaps, they add to the company’s financial complexity, which has since fueled investor skepticism.
“What’s part of the problem is the lack of transparency, combined with a complex balance sheet,” said Danske’s Landeman.
On top of that, Batljan’s outsized influence — controlling 31.6% of voting rights in addition to his executive role — has raised red flags. S&P warned last year that SBB’s reliance on its founder creates “a higher risk of conflicts of interest” than under a more diversified governance structure.
SBB has led the way with efforts to divest assets to raise capital, and European peers such as Vonovia SE and Aroundtown SA are beginning to follow suit. But Batljan’s focus on municipal buildings and rent-controlled apartment blocks might make SBB’s properties harder to sell at a time when buyers can be picky.
“Real estate investors should learn lessons from SBB’s story,” said Edoardo Gili, an analyst at real estate research firm Green Street. “When difficult times come — such as a rising yield environment — leverage and governance become the most important factors.”
--With assistance from Jack Sidders, Niclas Rolander, Libby Cherry and Jonas Ekblom.
(Adds Riksbank comment in sixth paragraph)