After losing $2 billion last spring, Alecta is under the spotlight again for its sizeable stake in Heimstaden Bostad
(Bloomberg) — Sweden’s biggest pension fund parted ways with chairwoman Ingrid Bonde this week, six months after Alecta incurred $2 billion in losses from three failed bets tied to the collapse of Silicon Valley Bank in the US.
The departure of Bonde, 63, adds to the growing list of executives who have left the Stockholm-headquartered firm in the wake of the crash. In recent months, the fund has appointed a new chief executive officer, chief investment officer and head of equity portfolio management.
Yet Alecta, which is entrusted with overseeing 1.2 trillion kronor ($101 billion) of retirement savings for a quarter of the Swedish population, will need more than a fresh roster of senior managers to avert another looming crisis. Surging interest rates, which upended Alecta’s stock-picking strategy in the US, are now putting intense pressure on the fund’s biggest single holding – a 49 billion kronor bet on a heavily indebted Swedish landlord called Heimstaden Bostad AB.
Read More: How Sweden’s Biggest Pension Fund Was Roiled by a US Bank Crisis
With Europe’s real estate industry teetering, Heimstaden Bostad is currently scrambling to plug a capital shortfall that Swedbank analyst Axel Andersson estimates could run as high as 30 billion kronor, without which the company faces the risk of losing its high-grade credit rating — a vital tool for landlords reliant on bond markets to finance their operations. Andersson said that Alecta’s share of the overall capital injection could be about 11 billion kronor.
Sweden’s real estate risks were thrown into sharp relief on Friday as the country’s financial watchdog summoned landlords to discuss property valuations as it reviews potential impacts to financial stability. Separately, Heimstaden AB — the largest owner in Heimstaden Bostad along with Alecta — raised as much as 2.5 billion kronor by divesting its Icelandic portfolio, which had a book value of about 6 billion kronor.
Heimstaden Bostad is currently two steps above a junk rating, but a downgrade to BB+ or lower would have major ripple effects across the industry. The residential landlord holds about $12 billion in outstanding public debt, putting it among the biggest bond issuers in Europe’s property sector, according to data compiled by Bloomberg.
Alecta has a 38% stake in Heimstaden Bostad, making it the largest joint-stakeholder alongside a property investment company owned by Norwegian billionaire Ivar Tollefsen. Yet for the pension company, there’s one big problem standing in the way of making a capital commitment: what it says is an unbalanced shareholder agreement that it signed in 2013, under which Alecta has only junior partner status in the operation of Heimstaden Bostad.
The contract is mired in complexity, but the concern for Alecta and other minority shareholders such as Swedish insurance group Folksam is that they are not getting enough say in the landlord’s decision-making, despite kicking in 89 billion kronor since 2016.
“Alecta has received a return on the investment in Heimstaden Bostad, but not enough payment for the risk we took, and there are also question marks regarding whether we have reasonable influence,” the pension group said in a statement last week.
Bonde was appointed chairwoman in 2019, and took the lead role on Alecta’s powerful finance committee, which oversees the pension fund’s “day-to-day investment activities,” according to the annual report. That year, Alecta ploughed 6.2 billion Swedish kronor into Heimstaden Bostad, its biggest investment for that year by far. Last April, the firm said it had written off 3 billion of its 49 billion kronor investment in Heimstaden Bostad, but that this figure could increase as landlords continue to struggle with a funding crunch and limited opportunities to sell assets.
The outgoing chairwoman did not name Heimstaden Bostad in her exit statement, but the threat of yet another possible scandal — and the renewed flurry of media attention — had evidently gotten to her.
“In a situation where there has been too much focus on me as a person, I have decided to resign,” Bonde said.
For whoever replaces her, the decision over whether to inject more capital into a business that may find itself at the center of Europe’s unfolding real estate crisis will not be an easy one.
While divestments could help relieve pressure on Heimstaden Bostad, analysts expect that a rights issue – that is, an invitation to existing owners to purchase more shares – will be needed to stabilize the company. “A rights issue could be necessary to maintain Heimstaden Bostad’s investment-grade credit rating,” said Green Street’s Edoardo Gili. He added that a capital raise would be “more complicated” in light of Alecta’s US banking and governance issues.
Read More: Landlord Heimstaden Bostad Threatened With Rating Cut by Fitch
Any additional influx of capital, however, will be contingent on securing better investment terms, according to Alecta. The current situation, it explained in the statement last week, is “based on a shareholder agreement that we are not happy with.”
Folksam Chief Investment Officer Marcus Blomberg echoed this sentiment in an interview. “We would like to see greater control for the minority investors,” he said. Blomberg confirmed that a simpler shareholder agreement was now under discussion among Heimstaden Bostad’s owners.
Alecta has already hired a team of lawyers to probe the terms of the original investment, and Sweden’s watchdog has launched an investigation to see if the pension group followed the relevant guidelines in investing and handling risk.
“It’s fundamental that companies have control over risk and manage it in their investments,” Sweden’s Financial Supervisory Authority said in written comments to Bloomberg. The watchdog is also investigating Alecta over its US banking missteps.
The outcome will depend heavily on the reaction of Norwegian property magnate Tollefsen and his property investment company Heimstaden, which holds 50% of the votes and all class-A shares in the landlord Heimstaden Bostad. The dividends of those shares are based on an amount equal to 0.05% of the total market value of the landlord’s properties, according to a copy of the agreement seen by Bloomberg News. That effectively means Tollefsen has been the main beneficiary of increased payouts as the portfolio of residential homes ramped up to 340 billion kronor in the space of just 10 years.
Chief Investment Officer and Deputy Chief Executive of Heimstaden AB, Christian Fladeland, played down talks over the shareholder agreement, calling it “a living document that has been developed over time and we don’t see anything extraordinary in that.” He did, however, warn that “the company’s capacity to participate in any rights issue is more restricted than other shareholders.”
Finally, Alecta’s decision over whether to double-down on its souring property bet will also be closely watched in the court of public opinion. The scandal over Alecta’s US bank losses sparked an outcry in Sweden, made worse by the fact that the pension fund had recently exited its investments in local lenders Svenska Handelsbanken AB and Swedbank AB.
The number of customers who moved their savings out of Alecta’s occupational pension plan was slightly above 9,000 for the first four months of 2023 — the height of the SVB fallout. In previous years, the average for that period had been between 6,000 and 7,000, according to spokesman Jacob Lapidus.
Since the summer, Lapidus said that the number of customers leaving Alecta had been “slightly above normal levels.”
While the impact of Heimstaden Bostad’s property write-downs looks manageable for now — in part because much of Alecta’s business is in employer pension plans — anger is once again surfacing over the fund’s real estate strategy and perceived lack of governance controls.
“It is money from Swedish wage earners that Alecta oversees,” Asa Lindestam, chair of the Swedish pensioners organization PRO, said in an interview. “This requires a very high standard from those allowed to manage the capital.”
Lindestam, whose organization represents 270,000 members, said that confidence in Alecta’s administration must be restored given that Swedes give as much as 15% of their pension savings to the firm.
“People must be able to trust that their pension money is managed with good judgment,” she said.
–With assistance from Rafaela Lindeberg and Niclas Rolander.
(Adds financial watchdog review and Heimstaden divestment in fifth paragraph)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.