Rating action

Scope Ratings has today assigned a first-time issuer rating of BBB-/Stable to Compactor Fastigheter AB. A first-time rating of BBB- was also assigned to the company’s senior unsecured debt and a first-time rating of S-3 to its short-term debt.

Rating rationale

Compactor Fastigheter’s business risk profile (rated BB) benefits from its ‘buy-and-hold’ investment approach, which focuses on cash flows from recurring dividends through its core investments to real estate corporates Fastpartner and SBB i Norden. As the company’s core exposures dominate the blended industry risk profile of BB+, they support the business risk profile. All of Compactor’s financially relevant holdings in terms of gross asset values or income contribution are publicly listed companies. Compactor holds most of its real estate through either Fastpartner or SBB i Norden, both of which are listed companies in well-developed markets benefitting from high trading volumes, and as such could provide cash inflows through partial liquidation if needed. The remainder of Compactor’s holdings are in large Nordic blue-chip stocks, which provide a daily trading volume that exceeds Compactor’s shareholdings. Scope therefore views the liquidity of shareholdings as a strength for Compactor’s business risk profile assessment.

Compactor’s business risk profile is somewhat constrained by its relatively limited diversification, in terms of only being exposed to two core holdings (representing 93% of gross asset value) and in terms of geographies, with 87% of recurring income stemming from Sweden and to a smaller degree from the Nordics. The limited geographical diversification is somewhat mitigated by the exposure to stable and mature economies with strong welfare and social systems that soften the economic burden and, in turn, potential rental losses in times of distress. Compactor shows a highly concentrated portfolio by industry, as it is predominantly exposed to two industries (commercial and residential/social infrastructure real estate), which represent 94% of the company’s net asset value and 87% of its recurring income. While this concentration holds the rating back, the more diverse industry spread and good tenant quality of its underlying holdings act as a mitigant.

Compactor Fastigheter’s financial risk profile (rated A-) benefits from very strong total cost coverage, which stood at 2.6x at year-end 2019 and is expected to remain around 2x going forward. The strong cost coverage is driven by strong recurring cash flows from its core holdings in relation to the very limited overhead costs of below SEK 1m, low interest payments due to its limited amount of debt, tax payments and a SEK 80m dividend to shareholders (suspended in 2020). The company’s low Scope-adjusted loan/value ratio (LTV), assessed to be 6% at end-June 2020, is perceived as credit-positive, particularly in the current market environment. On Scope’s calculations, the company’s LTV has been between 2% and 9.5% over the last five years, which demonstrates its conservative risk profile. While the LTV remains strongly exposed to the volatility of its underlying holdings’ share prices, Scope’s sensitivity analysis shows that it would take a further decrease of 35% from today’s share prices (debt unchanged) to take LTV above 10% (a still very low level).

Scope assesses Compactor’s liquidity to be adequate given i) the positive Scope-adjusted free operating cash flow, even during a difficult 2020; ii) the undrawn portion of loan facilities worth SEK 115m; iii) the unrestricted cash of SEK 21m (as at end-June 2020); iv) a highly liquid portfolio of blue-chip shares that could be unwound at short notice, worth SEK 1.9bn (as at end-June 2020); and v) maturing bond debt of SEK 500m in October 2020. The latter is intended to be refinanced with a new SEK 500m bond.

Outlook and rating-change drivers

The Outlook for Compactor is Stable and incorporates a continuation of the company’s main long-term holdings in Fastpartner and SBB i Norden in addition to its investment in liquid blue-chip stocks in the Nordics. It further incorporates Scope’s expectation that the company will not engage in further debt-financed increases in shareholdings and thereby keep its leverage, as measured by Scope-adjusted LTV, below 10% while maintaining total cost coverage at around 2x going forward.

A negative rating action would be possible if Compactor’s total cost coverage deteriorated below 1.3x on a sustained basis. This could be the result of its main holding Fastpartner not being able to pay dividends.

A positive rating action is remote but could be warranted if the company diversifies its holdings, allowing for a larger share of non-commercial real estate. This could be the result of a more granular investment portfolio through either the organic growth of its non-commercial real estate exposure or a reshuffle of investments.

Long-term and short-term debt ratings

At the end of Q2 2020, Compactor had SEK 295m in unsecured bank debt in addition to SEK 500m in unsecured bonds. Senior unsecured debt benefits from a relatively high unencumbered asset ratio of more than 1,500%, according to Scope’s calculations, providing a high pool of collateral to debtholders. Scope therefore rates senior unsecured debt at the issuer’s level of BBB-.

The S-3 short-term rating is supported by adequate liquidity, good banking relationships, and adequate access to diverse funding sources.

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) 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 entties 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 10 September 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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