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Rating action

Scope Ratings has today affirmed the BBB issuer rating of Samhällsbyggnadsbolaget i Norden AB (SBB) and revised the Outlook to Negative from Stable. Scope has also affirmed the BBB senior unsecured debt rating, BB+ subordinated (hybrid) debt rating and S-2 short-term debt rating.

Rating rationale

The rating affirmation is driven by SBB’s business risk profile, which benefits from the company’s exposure to low-risk community service properties and rent-regulated residential real estate. However, Scope sees heightened uncertainty and a deterioration in the company’s financial risk profile, reflected in the Negative Outlook.

SBB’s business risk profile (assessed at BBB+) benefits from 91% of assets being exposed to low-risk community services and rent-regulated residential properties, both of which are exposed to long-term demographic trends rather than economic cycles. SBB’s size and dominance in its segment, with Scope-adjusted assets of SEK 186bn (EUR 17bn) and a leasable area of 5.3m sq m (both as at Q3 2022), enables strong access to investment markets and diversified sources of funding inside and outside its jurisdictions (the latter being demonstrated by a US private placement). A planned spinoff of an SEK 18bn residential portfolio into a separate entity does not impair Scope’s assessment.

Asset quality is a further driver of SBB’s business risk profile, with properties located mostly in metropolitan and university areas and liquid assets demonstrated by a series of recent asset disposals. Demographic megatrends resulting in an ageing population and higher welfare spending bode well for its exposure to elderly and health care, while exposure to education benefits from strong expected growth in young age groups. These trends create strong demand and assure a high EPRA occupancy of 95.2% as of Q3 2022. An above-average WAULT of 11 years, up from last year’s figure of nine years, provides high cashflow visibility. Scope sees SBB’s initiatives within resource management and product innovation, as well as its activities on the social front that reduce regulatory and reputational risks, as a further strength of its asset quality (ESG factor: credit positive).

The business risk profile remains somewhat constrained by profitability that is below peers, with a Scope-adjusted EBITDA margin of 62% for the last 12 months to end-September 2022 and 60%-65% forecasted in Scope’s base case going forward. The CPI pass-through on community service properties and the planned spinoff of the residential portfolio have the potential to increase profitability, but its materialisation remains to be seen. SBB’s tenant profile remains concentrated, with the top three tenants accounting for 11% of revenue (previous year: 19%) and the top 10 tenants accounting for 24% (previous year: 37%), although Scope acknowledges the improvement in concentration. SBB’s tenant concentration is due to the nature of its business and is largely mitigated by almost half of its key tenants having exposure to Nordic governments. The remainder are indirectly exposed to governments through services provided by private companies in elderly housing, health care and education, whose costs are ultimately covered by welfare budgets.

SBB’s operations are currently undergoing major changes, partially driven by the company’s strategic review and a related simplification of its structure and balance sheet as well as asset disposals. Other drivers include market sentiment and rising interest rates. These changes will impact its financial risk profile (assessed at BBB-). With its Q3 results at end-October 2022, the company announced it would spin off a significant residential portfolio (SEK 18bn; around 10% of Scope-adjusted total assets) into a separate entity with shares to be distributed to existing SBB shareholders. This comes in addition to an earlier signed letter of intent to sell a portfolio of SEK 9bn and additional ongoing disposals in Q4 2022.

The Scope-adjusted loan/value (LTV) ratio stood at 47% as at end-September 2021, and has slowly increased to 53% at end-September 2022. This was due to disposals not being matched by relative debt reductions and negative fair value adjustments, predominantly in the residential portfolio in Q3 2022. Scope has reflected i) all the ongoing disposals, including the expected spinoff of the residential portfolio, and ii) further market-induced yield widening in Q4 2022 and 2023 in its base case. The latter affects asset values negatively (by 2% and 4% respectively), with counterbalancing effects coming from CPI-linked rents in community service properties and (to a lesser degree and with a lag) the residential portfolio. Scope estimates an LTV ratio of 51% at YE 2022 that will slowly increase to 53% in 2024. However, the ultimate financial impact of current transactions and balance sheet improvements remains uncertain and could have an effect on forecasted figures. Leverage, as measured by the Scope-adjusted debt/EBITDA ratio, remains around 20x.  

SBB’s Scope-adjusted EBITDA interest cover was above 3x for the last three years and currently stands at 3.5x (last 12 months to end-September 2022). The company’s average funding rate increased significantly throughout 2022, with and the latest reading at 1.89%, up from 1.11% at YE 2021. This reflects a more challenging funding situation for the sector, higher interest rates and an increased hedging ratio of 80%, benefitting the company’s interest cover going forward. Nevertheless, reflecting all the Q4 changes, Scope expects interest cover of 3.1x for 2022, dropping to 2.4x in 2023. In early November the company announced a tender offer for several of its hybrids and senior bonds up to EUR 650m. If bought back at a discount (where they currently trade), this would benefit the balance sheet and potentially reduce the interest burden compared to Scope’s base case.

Liquidity is adequate as cash sources cover uses by about 2x as of 30 September 2022. The company benefits from a large multi-year credit facility (SEK 16bn undrawn), a low secured LTV ratio of 19% and well-spread maturities. Scope believes the company has good access to capital markets and secured lending. The low secured LTV ratio and ample unencumbered assets provide sufficient headroom to refinance short-term debt. 

One or more key drivers of the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Outlook for SBB is Negative and reflects Scope’s view of a challenging funding market for the sector increasing funding costs, uncertainty tied to significant transactions in Q4 2022 and a deterioration expected in the company’s interest cover below previously assumed levels of around 3x. The agency expects SBB to keep its LTV ratio below 55% though cautions a heightened risk of it approaching 55%, while interest cover is expected to deteriorate towards 2.2x.

A negative rating action is possible if the Scope-adjusted LTV ratio moved above 55% or interest coverage moved below 2.2x on a sustained basis. This could occur through significant, predominantly debt-funded acquisitions or a severe reduction in the fair value of properties compared to Scope’s base case. The latter could be driven by higher-than-anticipated funding costs and lower debt repayments.

A positive rating action, i.e. the revision of the Outlook back to Stable, would require Scope-adjusted LTV to remain below 55% paired with interest coverage returning comfortably above 2.2x. This could be driven by a lower proportion of debt-funded capex, decreased refinancing needs through stronger-than-anticipated portfolio cash flows, an improvement in market sentiment resulting in stable asset values, or a change in the funding mix. 

Long-term and short-term debt ratings

As of 30 September 2022, SBB had SEK 56bn in senior unsecured debt outstanding. Senior unsecured debt benefits from a high unencumbered asset ratio of more than 170%, providing a large pool of collateral to debt holders.

Hybrid bonds amounting to SEK 18bn benefit from coupon deferral at the issuer’s discretion, deep contractual subordination and a sufficiently long remaining maturity. As such, Scope grants 50% equity credit for these hybrid debt instruments.

The S-2 short-term rating is supported by a better-than-adequate liquidity, strong banking relationships, good access to diverse funding sources and access to undrawn committed credit lines with maturities beyond one year.

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, (European Real Estate Rating Methodology, 25 January 2022; General Corporate Rating Methodology, 15 July 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 12 November 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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