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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Samhällsbyggnadsbolaget i Norden AB (SBB) to BBB- from BBB/Stable. Scope has also downgraded the senior unsecured debt rating to BBB- from BBB, the subordinated debt rating to BB from BB+ and the short-term rating to S-3 from S-2. All ratings have been placed under review for a possible downgrade.

Rating rationale

The rating downgrades driven by Scope’s expectation that interest cover will continue to weaken to below 2x, based on the step-ups on SBB’s bonds and the expected rise in financing costs driven by uncertainties arising from the strategic review¹. The recently announced strategic review is also considering the full or partial sale of SBB to unlock value for shareholders, which creates uncertainty about the future composition of assets and liabilities, prompting Scope to place all ratings under review for a possible downgrade.

The business risk profile (unchanged at BBB+) could come under pressure from a partial sale of SBB or a significant share of its assets. Namely, Scope’s market share and diversification assessments could be affected by a shrinkage in size that decreases visibility to tenants or a higher concentration of tenants, properties and geographies. Asset quality and operating profitability are also highly dependent on asset disposals.

The financial risk profile has deteriorated (down to BB+ from BBB-) as financing costs will increase to account for the uncertainties prompted by the strategic review. The financial risk profile was already under pressure due to the coupon step-ups on outstanding senior unsecured bonds triggered by recent rating downgrades of SBB by other rating agencies. The financial risk profile could improve if proceeds from a partial (non-structured) sale of a large share of SBB’s portfolio were used to significantly reduce debt, which would also increase interest coverage. Scope’s assessment of a full sale of SBB will depend on the eventual acquirer’s financial strength and its treatment of creditors in the takeover, though
the latter would be complicated by change-of-control clauses regarding SBB's debt.

SBB’s strong business risk profile continues to benefit from 91% of its assets being exposed to community services and rent-regulated residential properties, which are low risk and subject to long-term demographic trends rather than economic cycles. SBB’s size and dominance in its segment, with Scope-adjusted assets of SEK 162bn (EUR 14.5bn) and a lettable area of 4.7 million sq m (both as at Q1 2023), enables strong access to investment markets. Further positive drivers include high asset quality, with properties mostly in metropolitan and university areas, and the liquidity of its assets, demonstrated by recent asset disposals. Demographic megatrends of an ageing population and higher welfare spending also bode well for the exposure to elderly and health care. Strong expected growth in the younger population will also benefit its exposure to the education sector. These trends are strengthening demand and assuring a high EPRA occupancy of 95.5% as of Q1 2023. The above-average WAULT of 10 years also provides high cash flow visibility. SBB’s initiatives within resource management and product innovation as well as its activities on the social front that reduce regulatory and reputational risks serve to further strengthen asset quality (ESG factor: credit positive).

The business risk profile remains somewhat constrained by a profitability that is below peers, with a Scope-adjusted EBITDA margin in the lower end of the 60%-65% forecasted in Scope’s base case. The tenant base also remains concentrated, with the top three accounting for around 11% of revenue and the top 10 for around 24%. However, this concentration is due to the nature of SBB’s business and is largely mitigated by almost half of its key tenants having an exposure to Nordic governments. The remaining tenants provide an indirect state exposure as they provide services in elderly housing, health care and education, whose costs are covered by welfare budgets.

The deterioration in the financial risk profile has been despite solid cash flows, driven by interest step-ups in about 45% of SBB’s outstanding bonds and by the strategic review that has made a further rise in financing costs possible. Scope therefore expects interest cover to deteriorate to 1.8x for 2023-2024, breaching Scope’s rating-change trigger of 2.2x. The loan/value ratio in Q1 2023 was stable at 55%, as the effect of SEK 8.7bn in proceeds received in the sale of EduCo with Brookfield was counteracted by fair value decreases by 1.7%. Since Q1 2023, liquidity has improved further through disposals and liquidity-boosting actions (see paragraph below), which if applied for debt reduction as per the company’s guidance would take the Scope-adjusted loan/value ratio to 50% at YE 2023 before again moderately increasing during 2024 due to further fair value corrections and the resumption of dividends. Given the strategic review, Scope has not factored in the SEK 3.9bn of further disposals under the company’s guidance of SEK 6bn for the year.

Liquidity is adequate despite a ratio of only at 1x as of Q1 2023. Measures to generate or preserve liquidity since Q1 2023: i) a proposed postponement of dividends expected to be approved at the extraordinary meeting on 14 June 2023, which will preserve SEK 2.6bn of cash and replace the intended capital raising that became unfeasible after the credit rating downgrade; ii) the sale of 19m shares in listed residential developer JM AB (91% of SBB’s holding) for SEK 2.8bn in cash; iii) the disposal of SEK 2.1bn properties in Q2 2023; iv) the expected receipt of SEK 500m for the EduCo sale in Q2 2023; and v) the newly signed SEK 2.4bn credit facility, which comes on top of the existing SEK 2.4bn. In addition, unrestricted cash amounts to SEK 4.1bn as of Q1 2023. Upcoming maturities over the next 12 months consist of SEK 8.7bn of bonds, which the company intends to retire with cash and cash flows, SEK 3.2bn of secured bank debt and SEK 2.5bn of commercial paper.

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

Under review for possible downgrade

Scope will closely monitor any developments regarding the disposal of properties as disclosed by the strategic review. Scope will also monitor the use of any proceeds and the impact any partial sale would have on portfolio value. The first step of SBB’s strategic review was to replace the founding CEO with an external CEO (Leiv Synnes), which may cause a change in strategic orientation that has credit implications. Scope will resolve the under-review status once there is sufficient clarity on the implementation of SBB’s strategic review.

An upgrade is remote and would require the Scope-adjusted loan/value and interest cover to more than compensate for the negative effect of a partial sale of SBB. A positive rating action in case of a full sale of SBB would require a financially strong acquirer that honours obligations to existing debt holders.

A rating confirmation could occur if any deterioration in the business risk profile through a partial asset sale could be compensated for through stronger credit metrics, exemplified by an interest cover sustained above 2x.

A downgrade of at least one notch could occur if the business risk profile deteriorated while the Scope-adjusted loan/value ratio remained at 55% and interest cover at 1.8x or lower. This could be triggered by i) assets being sold in a structured fashion with sub-par deleveraging; ii) a partial sale of SBB at a steep discount that results in a significant depreciation of the remaining portfolio’s value; and/or iii) the strategic review resulting in measures that fail to stem the current deterioration in the financial risk profile. A negative rating action could also occur if refinancing became more expensive than anticipated by Scope, which is possible as banks are currently cautious about expanding loan books and regulators are increasingly emphasising prudent lending. This could be exemplified by interest cover being sustained below 1.7x. A negative rating action could also happen through an inability in the next couple of quarters to secure funding that can sustainably cover short-term financial obligations, possibly also via asset disposals/swaps or secured lending.

Long-term and short-term debt ratings

As of 31 March 2023, SBB had SEK 49.5bn in senior unsecured debt outstanding. Senior unsecured debt benefits from a high unencumbered asset ratio of more than 170% that provides a large pool of collateral to debt holders.

Hybrid bonds amounting to SEK 15.7bn (as of Q1 2023) benefit from coupon deferral at the issuer’s discretion, deep contractual subordination and a long remaining maturity. As such, Scope grants 50% equity credit for these hybrid debt instruments.

The S-3 short-term rating is supported by adequate liquidity, strong banking relationships, adequate access to diverse funding sources and access to undrawn committed credit lines with maturities beyond one year.

Rating driver references
1.Press release SBB i Norden

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 Outlooks, (European Real Estate Rating Methodology, 25 January 2023; 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, the Rated Entities' Related Third Parties 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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 12 November 2021. The Credit Ratings/Outlooks were last updated on 9 December 2022.

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

Conditions of use/exclusion of liability
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