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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating of Compactor Fastigheter AB at BBB-/Stable. The company’s senior unsecured debt rating has been affirmed at BBB- as was the S-3 rating of its short-term debt.

Rating rationale

The rating action reflects Compactor’s stable operations, with Scope’s assessments unchanged on the business risk profile (at BB) and the strong financial risk profile (at A-). The financial risk profile benefits from a substantial total cost coverage of around 2x and a Scope-adjusted loan/value ratio of below 10%.

Compactor’s core holdings, Fastpartner (BBB-/Stable) and SBB i Norden, were relatively unaffected by Covid-19 and contributed stable recurring dividend income during the last 12 months. For 2020, the company’s other large liquid holdings, comprising several Swedish banks and retailer H&M, suspended dividends due to regulatory or business reasons. All banks resumed dividend payments in 2021; H&M expects to do so only later this year. In early September 2021, Fastpartner raised SEK 500m in D-share capital, in which Compactor participated pro-rata to keep its roughly 72% shareholding. This underlines Compactor’s commitment to its buy-and-hold core holdings and provides another layer of stable and favourable dividend income going forward.

Compactor’s business risk profile benefits from its buy-and-hold investment approach, which focuses on cash flows from recurring dividends through its two core real estate investments (Fastpartner and SBB i Norden), in addition to dividend income from Nordic blue-chip stocks. The liquidity of shareholdings is a strength for Compactor’s business risk profile assessment, as all of its financially relevant holdings in terms of gross asset value or income are publicly listed.

Compactor’s business risk profile is somewhat constrained by its relatively limited diversification. The company is highly exposed to its two core holdings (i.e., those representing more than 5% of gross asset value). Further, in terms of geographies, 92% of its recurring income stems from the Nordics, predominantly from Sweden. Though this is somewhat mitigated by the exposure to stable and mature economies that soften the economic burden in times of distress, as witnessed during the ongoing pandemic. Compactor also has a high concentration by industry: two industries (commercial and residential real estate) represented 92% of net asset value and 94% of recurring income in 2020. 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’s financial risk profile benefits from very strong total cost coverage, which stood at 3.9x at year-end 2020 (helped by the cancellation of the annual dividend to owners) and is expected to remain at around 2x going forward as dividends resume. The strong cost coverage is driven by strong recurring cash flows from its core holdings in relation to the very limited overhead costs of around SEK 1m, consisting of low interest payments due to its limited amount of debt, tax payments and a SEK 80m dividend to shareholders. in October 2020, a SEK 500m maturing bond was refinanced with a SEK 750m bond (since tapped twice to the maximum allowed SEK 1,000m) at a more favourable spread (down by 150bps), reducing the interest burden. The company’s low Scope-adjusted loan/value ratio (LTV), assessed at 7.2% at end-June 2021, is credit-positive. Scope calculates the company’s LTV at between 2% and 9.5% over the last six 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 30% from end-June 2021’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 of SEK 234m, even during the pandemic; ii) the undrawn portion of loan facilities worth SEK 145m; iii) the unrestricted cash of SEK 83m (as at end-June 2021); iv) a highly liquid portfolio of blue-chip shares that could be unwound at short notice, worth SEK 3.1bn (as at end-June 2021); and v) the only short-term debt being bank debt of currently 255m outstanding, part of a framework agreement which is rolled over under normal circumstances.

Outlook and rating-change drivers

The Outlook for Compactor is Stable and incorporates the company continuing to hold its main long-term holdings in Fastpartner and SBB i Norden in addition to liquid Nordic blue-chip stocks. 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 an inability of its main holding Fastpartner to pay dividends.

A positive rating action is remote but could be warranted if the company’s holdings diversified towards 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 2021, Compactor had SEK 255m in senior unsecured bank debt in addition to SEK 1,000m in senior unsecured bonds. The senior unsecured debt rating is affirmed 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 Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021), is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 10 September 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.