Scope Ratings reviews its ratings either yearly, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations. Monitoring reviews are unrelated to the calendar that outlines public finance rating actions.

Scope performs monitoring reviews to determine whether outstanding ratings remains proportionate. Monitoring reviews are conducted either by performing a portfolio review in terms of the applicable methodology/ies, latest developments, and the rated entity’s financial and operational aspects relative to similarly rated peers; or through targeted reviews on an individual credit. Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review on Klövern AB, including the current issuer rating of BBB-/Stable, on 9 June 2021. This monitoring note does not constitute a rating action nor does it indicate the likelihood of a credit rating action in the short term. The latest information on the credit ratings in this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Klövern’s business risk and financial risk profiles are in line with Scope’s base assumptions as outlined in the initial rating action in June 2020. Two notable events in the last 12 months were: i) the resignation of long-time CEO Rutger Arnhult to assume the position as chairman of the board in Castellum; and ii) the public offer from Corem Property Group AB to acquire all outstanding Klövern shares with consideration in the form of newly issued shares in Corem.

Scope’s assessment of Klövern’s business risk profile (assessed at BBB) remains intact and is the primary driver of the assigned rating. The company’s portfolio has undergone minor adjustments over the last 12 months. The current portfolio, with around 340 properties with a total gross leasable area of 2.4m square metres, translates into decent diversification in terms of tenants and locations. This enhances resilience to cash flow volatility caused by economic cycles (as witnessed with the current pandemic), industry developments, regulatory changes, and the loss or default of single tenants. In the last 12 months, Klövern’s rights issue of SEK 2.0bn in late 2020 and issuance of SEK 4.5bn in green bonds (amongst further bank/bond refinancing) demonstrate its good access to capital. Klövern’s moderate or dominant position in most areas provides visibility to new tenants and flexibility for the needs of existing ones. The rating also benefits from the company’s geographical outreach across three countries and focus on liquid markets classified as ‘A’ cities by Scope.

The business risk profile continues to be constrained by the relatively short WAULT, unchanged at 3.5 years since the last review. This exposes the company to ongoing re-letting risk, though somewhat mitigated by the stability of the metric, also during the pandemic. The company’s strategy (acquiring properties in inner-city/near-city locations with below-par occupancy with the potential for property development) results in a low occupancy rate relative to peers’, at around 90%, which holds the rating back, though the effect is tempered by the stability of the rate over the last decade. Profitability as measured by the Scope-adjusted EBITDA margin of 60-65% is at the lower end of the peer group (12 months ending March 2021: 61%).

Klövern’s financial risk profile assessment (assessed at BB+) remains intact. The financial risk profile benefits from the historically strong debt protection as measured by the Scope-adjusted EBITDA interest cover, which has even remained above 2.2x during the pandemic (12 months ending March 2021: 2.5x) and is expected to continue above this rating threshold. The company’s leverage, as measured by the Scope-adjusted loan/value ratio, is constraining the rating somewhat. However, Scope highlights the significant reduction in leverage during 2019 due to portfolio streamlining, from nearly 60% towards mid-low 50s%, as well as the right issue in 2020, which kept leverage at just below 54% in 2020 (end March 2021: 53%)– which Scope foresees will be maintained. Despite Klövern’s reliance on short-term financing, Scope views liquidity as adequate, also in light of the large undrawn facilities and a secured loan/value ratio of 33%, which provide ample room to increase debt on existing properties if needed.

On 29 March 2021, Corem Property Group AB announced a public offer with consideration in the form of newly issued shares in Corem to the shareholders of Klövern AB (publ). Klövern’s board approved the merger in late May 2021, recommending shareholders to accept the offer (premium of around 28%-30% compared to last trading day pre-announcement, depending on the share class) and receive Corem shares as payment in kind. The acceptance period ends on 11 June 2021 unless extended; results are expected to be communicated on or after 14 June 2021.

If the merger goes through, Klövern will become a wholly owned subsidiary of Corem and make up around 80% of the combined entity. As operations are intended to continue as normal, the effect on Klövern as a standalone entity should be minimal. Klövern has obtained all necessary waivers for its bank debt, no change of the control clause in bond documentations has been or will be triggered, the outstanding bonds will continue to trade and be associated with Klövern, and Klövern intends to continue issuing quarterly financial updates.

The methodologies applicable for the reviewed rating and/or rating Outlook, (Rating Methodology: European Real Estate Corporates, 15 January 2021; Corporate Rating Methodology, 26 February 2020), are available on https://www.scoperatings.com/#!methodology/list.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Thomas Faeh, Executive Director

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