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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 has the S-3 rating of its short-term debt.

Rating rationale

The rating action reflects Compactor’s stable operations and Scope’s unchanged assessment of the business risk profile (at BB) and of the strong financial risk profile (at A-). The financial risk profile benefits from a substantial total cost coverage of 2.7x in 2021 and over 2x expected for the next 2-3 years and a relatively low Scope-adjusted loan/value (LTV) ratio that tolerates the current slump in equity valuations in its core portfolio.

Compactor’s core holdings, Fastpartner (BBB-/Stable) and SBB i Norden (BBB/Stable) have been relatively unaffected by Covid-19 and contributed stable recurring dividend income during the last 12 months to Q2 2022. All of Compactor’s blue-chip holdings resumed dividends, after some temporarily suspended or postponed them during the first phase of Covid-19 in 2020, which boosted recurring income to SEK 462m in 2021.

Compactor’s business risk profile benefits from its buy-and-hold investment approach, which focuses on cash flow 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 most notable change in its blue-chip portfolio is the disposal of its shares in AstraZeneca and the purchase of shares in Atrium Ljungberg and Volvo. The liquidity of shareholdings remains a strength for Compactor’s business risk profile, 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 (those representing more than 5% of gross asset value). 90% of Compactor’s recurring income stems from Nordic countries, predominantly Sweden. This exposure to stable and mature economies supports the company’s resilience to economic shocks, as witnessed during the Covid-19 pandemic and the ongoing European energy crisis caused by the Russia-Ukraine war. Compactor also has high industry concentration: the two industries of commercial and residential/social infrastructure real estate represented 89% of net asset value and 84% of expected recurring income in 2022. While this concentration holds back the rating, 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 2.7x in 2021 and is expected to remain at around 2x based on stable dividend expectations, while Scope’s base case assumes an increase in interest costs. The strong cost coverage is driven by strong recurring cash flow from its core holdings in relation to costs, consisting of the very limited overhead costs of around SEK 1.2m, tax payments, a SEK 80m dividend to shareholders and (rising) interest costs related to a still modest interest-bearing debt of SEK 1.8bn. Scope considers Compactor’s total cost coverage as highly resilient to a reduction in income streams. In a stress test in a hypothetical scenario, mandatory costs (excluding dividends) are still covered when taking out recurring dividends of its two core holdings. The company’s low Scope-adjusted LTV starting point that stood at 7.3% at end-2021 helped given the sell-off in Swedish real estate shares (and equities in general) in H1 2022. Compactor’s Scope-adjusted LTV increased to 14.2% at end-August 2022 due to the significantly reduced market value of its holdings. However, Compactor’s LTV is still relatively low given market stress and Scope views it as credit-positive. The company’s Scope-adjusted LTV has been between 2% and 9.5% over the last seven years, which demonstrates its conservative risk profile.

Scope assesses Compactor’s liquidity as adequate given i) the positive Scope-adjusted free operating cash flow of SEK 406m forecasted for 2022; ii) the undrawn portion of loan facilities worth SEK 200m; iii) SEK 114m of unrestricted cash (as at end-2021); iv) a highly liquid portfolio of blue-chip shares that could be unwound at short notice, worth SEK 1.4bn as at end-June 2022; and v) the only short-term debt that is bank debt of SEK 195m outstanding as at end-June 2022, 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 assumption of 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, between 10-15% while maintaining total cost coverage at around 2x.

A negative rating action would be possible if Compactor’s total cost coverage deteriorated below 1.3x on a sustained basis. This could occur if its main holding Fastpartner were unable 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 reshuffling of investments.

Long-term and short-term ratings

At the end of Q2 2022, Compactor had SEK 195m in senior unsecured bank debt in addition to SEK 1,600m in senior unsecured bonds. The senior unsecured debt rating is affirmed at BBB-, the same level as the issuer rating.

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, (General Corporate Rating Methodology, 15 July 2022), is 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 10 September 2020. The Credit Ratings/Outlook were last updated on 15 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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