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Rating action

Scope Ratings has today assigned a first-time issuer rating of BBB-/Stable to Fastpartner AB. A first-time rating of BBB- was also assigned to the company’s senior unsecured debt and a first-time rating of S-2 to its short-term debt.

Rating rationale

Fastpartner’s business risk profile (rated BBB-) benefits from its market position in the Swedish real estate market. With Scope-adjusted total assets of SEK 31.7bn (EUR 3.1bn) and a total lettable area of 1.5 million square meters as of Q2 2020, the company qualifies as a medium-sized European commercial real estate corporation. Fastpartner’s size means that cash flows have a decent resilience to market volatility, while its visibility in the market supports access to funding, demonstrated by regular issuances in debt and equity capital markets. Fastpartner’s strongest foothold, with assets worth SEK 23.6bn as at end June 2020, is in Stockholm where it holds a top five position. Scope sees the company’s fairly dominant market share as credit positive because it translates into higher visibility, more flexibility to accommodate changes in tenants’ needs and higher retention which, in turn, results in lower capex linked to fluctuations. Fastpartner intends to grow further in its home turf of Stockholm.

The company’s diversification in terms of property types benefits the rating. Tenant diversification is moderate, with the top three/ten tenants accounting for 9%/19%of rental income, in addition to the top 20 tenants being assessed as good investment grade. This significantly reduces the risk of cash flow deterioration due to a single tenant default/delayed payment. Fastpartner’s asset quality benefits from 89% of the portfolio (as measured by fair value) being located in metropolitan areas with more than 1 million inhabitants, resulting in good fungibility in times of distress and limited haircuts on portfolio values. The company’s weighted average unexpired lease term of 4.7 years as of Q2 2020 is average by European standards, but above-average compared to Nordic peers (4 years), translating into a lower reletting risk than peers. Fastpartner’s Scope-adjusted EBITDA margin has been stable in the high 60s. Scope expects it to reach 70% in the near term, supporting internal financing capabilities.

Fastpartner’s business risk profile is somewhat constrained by its relatively high geographical concentration. The company is focussed exclusively on Sweden, and within Sweden, Stockholm accounts for 79% of assets by fair value. This concentration is mitigated by: i) Stockholm’s status as the country’s economic powerhouse, assessed as an ‘A’ location with large and liquid property markets; and ii) Sweden’s mature and stable economy, whose strong welfare/social system is able to soften the impact of economic turbulence, as demonstrated by the ongoing pandemic. Fastpartner’s strategy of acquiring properties in near-city locations with good transportation links but below-par occupancy translates into a relatively low occupancy rate of around 91% at present. While the occupancy rate holds the rating back, the stability of the ratio, which moves within a narrow range, acts as a mitigant.

Fastpartner’s financial risk profile (rated BBB-) benefits from very strong debt protection, as measured by Scope-adjusted EBITDA interest cover levels above 3.5x. Scope forecasts that interest coverage will remain above 3.3x based on a continuation of low floating rates, while highlighting the currently low hedging rate of 14% as a risk factor. This risk is mitigated by: i) the macro-economic environment, which will probably lead to an extended period of zero or negative interest rates; and ii) the company’s headroom with debt protection levels acting as a buffer, allowing it to react without reaching uncomfortable levels. Scope-adjusted free operating cash flow (excluding discretionary capex such as acquisitions) is expected to cover maintenance capex and internal development projects going forward. The agency assumes that any additional acquisitions will be financed through either share/D-share/preference share issues, external debt or a combination of both. Fastpartner’s leverage as measured by its loan/value (LTV) has significantly improved from levels in the high 50s to 48% at end-2019, thanks to fair value adjustments and occasional equity issuances. Scope expects the company to maintain Scope-adjusted LTV levels at around 50%. Leverage as measured by Scope-adjusted debt/EBITDA has remained stable at around 12-13x, and is expected to remain at these levels going forward.

Fastpartner’s liquidity is adequate as sources cover uses by about 1.25x in 2020. Scope believes that liquidity is a manageable risk in the short to medium term, with sufficient headroom provided by: i) a reasonably low LTV of 36% on secured debt providing ample headroom to increase debt on existing secured debt; and ii) the company’s access to capital markets and its good banking relationships, with a wide range of potential funding sources.

Outlook and rating-change drivers

The Outlook for Fastpartner is Stable and incorporates a continuation of the company’s growth in its core market of Sweden, especially in the area of greater Stockholm, which Scope assumes will be financed with debt and equity. It further incorporates Scope’s expectation that the company will keep leverage, as measured by its Scope-adjusted LTV ratio, at around 50% while debt protection remains above 3x going forward. Continued strong cash flow generation, as measured by Scope-adjusted free operating cash flow, is expected to cover dividend payments going forward.

A negative rating action is possible if Fastpartner’s leverage, as measured by its Scope-adjusted LTV ratio, increases towards 55% on a sustained basis or debt protection weakens to below 3x. This could be driven by a rise in interest-bearing debt through highly debt-financed acquisitions or remortgaging. It could also be driven by a more severe impact of Covid-19, leading to a stronger than expected revision of rental prospects and a downward adjustment of the company’s asset values.

A positive rating action could be warranted by deleveraging, with a Scope-adjusted LTV ratio of around 40% on a sustained basis. This could be achieved with less debt-funded capex, decreased financial debt requirements through stronger than anticipated cash generation from the portfolio, and a less severe Covid-19 impact, resulting in positive fair value adjustments.

Long-term and short-term debt instrument ratings

Fastpartner has currently SEK 5.6bn of senior unsecured debt outstanding, consisting of SEK 1.2bn in commercial paper and SEK 4.4bn in senior unsecured bonds (of which SEK 1.3bn were issued under its green framework). These senior unsecured obligations benefit from a property pool of SEK 4bn in truly unencumbered assets in addition to SEK 6.2bn in unencumbered parts of secured properties (difference of secured LTV up to 60%). Scope assesses that the pool of unencumbered assets stands at SEK 10.2bn, providing a 185% coverage of unsecured assets. Scope therefore rates senior unsecured debt at the issuer level of BBB-.

The S-2 short-term rating is supported by adequate liquidity, good banking relationships, and strong access to diverse funding sources with regular issuances of various equity share classes and bonds. 

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these ratings and/or rating outlook (Corporate Rating Methodology, 26 February 2020; Rating Methodology: European Real Estate Corporates, 17 January 2020) are available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: the rated entity, public domain, the rated entities’ agents, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0 .
Lead analyst: Thomas Faeh, Executive Director
Person responsible for approval of the rating: Philipp Wass, Executive Director
The ratings/outlooks were first released by Scope on 31 August 2020.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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