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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating of Fastpartner AB at BBB-/Stable. The company’s senior unsecured debt rating has been as affirmed at BBB-, as has the S-2 rating of its short-term debt.

Rating rationale

The affirmation reflects Fastpartner’s stable operations and its unchanged business risk profile (assessed at BBB-) as well as a resilient financial risk profile (assessed at BBB) that can tolerate expected interest rate increases.

Fastpartner’s business risk profile benefits from its market position in the Swedish real estate market with Scope-adjusted total assets of SEK 39.4bn (EUR 3.7bn) and a total lettable area of 1.6m sq m as of end-June 2022 (up 3.7% YoY). Its visibility in the market supports access to funding, demonstrated by regular issuances in debt and equity capital markets. Fastpartner’s strongest foothold is in Stockholm, where it aims to grow its portfolio. In 2021, other areas were offering better value and Fastpartner increased its presence in the Swedish city of Norrköping.

Tenant diversification is moderate, with the top three tenants accounting for 9.2% and the top 10 for 19.1% of rental income as at Q2 2022. In addition, the top 20 tenants’ credit quality is seen as investment grade, significantly reducing the risk of cash flow deterioration due to a single tenant default or delayed payment. Fastpartner’s asset quality benefits from 82% of portfolio assets (as measured by fair value) being located in metropolitan areas with more than 1m inhabitants and demonstrating cash flow visibility with a stable weighted average unexpired lease term of 4.6 years as at Q2 2022, which is above average compared to Nordic peers (four years).

Fastpartner’s business risk profile is somewhat constrained by its relatively high geographical concentration, being focused exclusively on Sweden. Stockholm alone accounts for 77% of assets by fair value as at Q2 2022. This concentration is partially mitigated by: i) Stockholm’s status as an ‘A’ location with large and liquid property markets; and ii) Sweden’s mature and stable economy, whose strong welfare system can soften the impact of economic turbulence. Fastpartner’s strategy of acquiring properties in near-city locations with good transportation links but below-par occupancy rates translated into a relatively low occupancy rate of around 90% in the past. However, the company increased occupancy to 92% as at Q2 2022 (latest reading). Over the medium term, 94% is targeted through the strategy since 2020 of focusing on managing existing assets. The previous strategy was oriented towards growth.

Fastpartner’s financial risk profile benefits from strong debt protection, as measured by Scope-adjusted EBITDA interest cover of above 3.5x historically. The latest reading at LTM end-June 2022 stood at 5.1x. But, Fastpartner’s interest cover is strongly affected by the changing interest rate environment, as the company’s current hedging rate is at a low 13%. Scope foresees the 3-month Stibor rate (the common floating rate) to increase to 180bps going into 2023, taking the company’s interest cover down to below 4x in 2022 and to around 3x for 2023 and thereafter. Softening the downward pressure on the ratio from rising rates are the following factors: i) indexed rental agreements growing the top line; ii) relatively expensive old loans and bonds maturing in the near-term which are assumed to refinance at tighter spreads and absorb some of the rate hikes, and iii) the company’s headroom, with high interest cover as a starting point acting as a buffer to the negative rating triggers, which enables it to react without reaching uncomfortable levels. Fastpartner’s financial policy stipulates to keep its interest coverage ratio at least above 3x, which gives Scope further cause to believe that the company will act in time to avoid further significant deterioration below 3x.

Fastpartner’s leverage as measured by its Scope-adjusted loan-to-value (LTV) ratio has continued to improve over the last 12 months, falling to 44% as at end-June 2022 (down 1pp YoY), mostly thanks to fair value adjustments. Fastpartner has redeemed its preference shares in Q1 2022, which if kept would have resulted in an even lower LTV. In 2020, Fastpartner had also adopted a stricter financial policy, reducing its target LTV to below 48% (as calculated by the issuer) while increasing its target interest coverage ratio to above 3x. Bearing in mind the above-mentioned factors, Scope’s updated forecast expects an LTV around 45% for the foreseeable future. Scope cautions though that a potential widening of yields might not be balanced by improved cash generation and in turn apply pressure on fair value of properties, posing a risk to LTV. Leverage as measured by Scope-adjusted debt/EBITDA has remained stable at around 12x-13x historically. This is expected to decrease slightly going forward based on expected EBITDA growing faster than expected Scope-adjusted debt proportionally.

Fastpartner’s liquidity is adequate given that sources (SEK 210m in cash and SEK 3.5bn in committed credit lines both as at YE 2021 as well as SEK 620m in free operating cash flow forecasted for 2022) cover uses (SEK 3.2bn in short-term debt as at YE 2021) by about 1.3x in 2022. Scope believes that liquidity is a manageable risk in the short-to-medium term as sufficient headroom is provided by: i) a reasonably low LTV of 21% 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 continued growth in its core market of Sweden. Scope assumes such growth will be financed with debt and equity. In addition, it incorporates Scope’s expectation that the company’s leverage, as measured by its LTV, will remain between 40%-50% and that interest cover will decline to around 3x due to the rising interest rate environment. Continued strong cash flow, as measured by Scope-adjusted free operating cash flow, is expected to cover dividend payments going forward.

A negative rating action could occur if Fastpartner’s leverage, as measured by its LTV, reached above 50% on a sustained basis, or if debt protection weakened below 2.2x. This could be driven by a rise in interest-bearing debt through fully debt-financed acquisitions to significantly increase the portfolio’s size or unfavourable remortgaging. It could also be driven by more severe after-effects from the Covid-19 pandemic and the war in Ukraine, leading to a stronger-than-anticipated rise in interest rates and/or a downward adjustment in the company’s asset value.

A positive rating action could be warranted if deleveraging resulted in an LTV of around 40% on a sustained basis supported by a tightened financial policy. This could be achieved with less debt-funded capex, decreased financial debt requirements through stronger-than-anticipated cash generation from the portfolio, and continued strong demand for Fastpartner’s properties, resulting in positive fair value adjustments.

Long-term and short-term debt ratings

Fastpartner currently has SEK 8.6bn of senior unsecured debt outstanding, which comprises SEK 1.4bn in commercial paper and SEK 7.2bn in senior unsecured bonds (of which SEK 4.9bn was issued under its green framework). These senior unsecured obligations benefit from an increased property pool of SEK 12.5bn (up from SEK 9bn as at 2021) in truly unencumbered assets in addition to SEK 6.9bn in unencumbered parts of secured properties (with a difference of secured LTV up to 60%). Scope assesses the pool of unencumbered assets at SEK 19.4bn, which provides around 230% coverage by unsecured assets. Scope therefore rates senior unsecured debt at the issuer level of BBB-.

The S-2 short-term debt 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 Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 15 July 2022; European Real Estate Rating Methodology, 25 January 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 31 August 2020. The Credit Ratings/Outlook were last updated on 3 September 2021.

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
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