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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Samhällsbyggnadsbolaget i Norden AB (SBB) to BB- from BBB-. Scope has also downgraded the senior unsecured debt rating to BB- from BBB-, the subordinated (hybrid) debt rating to B- from BB and the short-term debt rating to S-4 from S-3. All ratings remain under review for a possible downgrade.

Rating rationale

The rating downgrades are driven by Scope’s assumption that Scope-adjusted EBITDA interest cover will continue to weaken and that ongoing disposals are required to preserve liquidity and cover short-term debt maturities. These disposals bear an execution risk regarding further deleveraging in terms of pricing and timing and limit the visibility of SBB’s future portfolio composition. Negative sentiment on investment markets might cause fair value depreciation and thereby impact leverage negatively. Lastly, Scope highlights a recent investigation by the Swedish financial services authority into violations of accounting provisions¹ linked to restatements of the 2021 annual accounts, uncertainties regarding an alleged covenant breach, which the company is disputing, and the recent restatement of the Q1 2023 report. These issues fuel further negative market sentiment and are negative governance factors (ESG factor: credit negative). The strategic review itself creates uncertainty about the future composition of assets and liabilities, prompting Scope to keep 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 of a significant share of its assets, as exemplified by its 26 June 2023 announcement about holding exclusive discussions with Brookfield to dispose of its remaining 51% in the EduCo joint venture². The market share and diversification assessments could be affected by i) a smaller size decreasing SBB’s visibility to tenants; or ii) 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 further (revised to BB- from BB+) as the recently opened investigation by the Swedish financial services authority on potential accounting violations in 2020 and 2021 fuels further negative market sentiment, which comes on top of covenant breach allegations (disputed by the company) and uncertainties prompted by the strategic review. The recent and expected disposals are borne out of necessity to ensure sufficient liquidity and address upcoming debt maturities. Liquidity is insufficient as the company’s external and internal funding capabilities are curtailed. All these factors contribute to restricting SBB’s access to capital markets, resulting in an expected further increase in funding costs and complicating asset sales under its strategic review process. Asset sales are a challenging task in the current market environment to start with, as many Swedish property companies are net sellers. The negative press around SBB and the pressure to execute disposals in the near term could result in transactions with discount to book values, in turn applying pressure on overall valuations of SBB’s properties and counteracting its deleveraging activities as measured by Scope-adjusted loan/value ratio. This comes on top of the negative sentiment in the general investment market, which is expected to result in continued fair value depreciations.

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. The potential disposal of its remaining 51% share of EduCo to Brookfield could provide needed relief on credit metrics such as Scope-adjusted EBITDA interest cover and longer-term liquidity assessment under the following conditions: i) it does not negatively affect the remaining portfolio market values; and ii) its proceeds are exclusively used for debt repayment. While Scope welcomes this public progress, it highlights the still early stage of the discussions and execution risk attached to transactions in general – though somewhat mitigated in this specific case through an already established joint venture relationship on the portfolio under discussion.

Liquidity is inadequate, even if sources cover uses for the 12 months until end-March 2023 at par. Measures to generate or preserve liquidity since Q1 2023 include i) the postponement of dividends by the board of directors on 21 June 2023³ based on the authorisation by the extraordinary general meeting on 14 June 2023⁴, which preserves SEK 2.6bn of cash and replaced 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 0.5bn for the EduCo sale in Q2 2023; and v) the newly signed SEK 2.4bn credit facility, which comes on top of an existing SEK 2.4bn one. Several of these liquidity measures are remedial actions to preserve sufficient funding for upcoming debt maturities. 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 proceeds and the impact any partial sale would have on portfolio value. The company’s intention of disposing of EduCo and discussions with joint venture partner Brookfield are a step in the right direction, though still at an early stage. Scope will resolve the under-review status once there is sufficient clarity on the implementation of SBB’s strategic review.

A downgrade of at least one notch could be triggered if the headroom under the financial covenants were reduced, e.g. if Scope-adjusted EBITDA interest cover were sustained at below 1.7x. This could be triggered if refinancing became more expensive than anticipated by Scope, which is possible as banks are currently cautious about expanding loan books and regulators increasingly emphasise prudent lending. A downgrade could also be triggered by a perceived deterioration in SBB's liquidity, e.g. the loss of undrawn revolving credit facilities to bridge short-term refinancing needs, the failure to roll over secured bank debt or the continued need to sell assets to cover debt maturities over the next 12 months on a rolling basis.

The ratings could be affirmed if the expected overall restructuring of the portfolio were credit neutral and SBB ensured that liquidity remained above 110% in the long term and no asset disposals were required to fund upcoming debt maturities.

An upgrade would require Scope-adjusted loan/value and interest cover to more than compensate for the negative effect of asset sales by 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. Liquidity would have to remain above 110% in the long term and SBB would have to regain access to the capital markets and thus have sufficient financing options to meet all upcoming debt maturities without selling assets.

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 an unencumbered asset ratio of more than 170% by Scope’s calculation, providing a pool of collateral to debt holders. Based on Scope’s General Corporate Rating methodology and reasonable discounts on the company’s asset base, Scope expects a superior recovery for senior unsecured debt. However, there are uncertainties around advance rates in the case of a hypothetical issuer default. Scope also highlights the high sensitivity of advance rates to the volume of senior secured debt at the time of a hypothetical default, resulting in the downgrade of the senior unsecured debt rating to BB- (in line with that of the issuer) from BBB-.

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. Scope grants 50% equity credit for these hybrid debt instruments. The recovery for subordinated unsecured debt is expected to be zero. Consequently, the rating has been downgraded to B- from BB.

Scope has downgraded the short-term debt rating to S-4 from S-3 in light of inadequate liquidity and a curtailed access to capital markets. However, SBB still has access to banks and to undrawn committed credit lines with maturities beyond one year.

Rating driver references
1.  Statement of Sweden’s Financial Supervisory Authority, 22 June 2023
2.  SBB i Norden – company news, 26 June 2023
3.  SBB i Norden – company news, 21 June 2023
4.  SBB i Norden – company news, 14 June 2023

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 2023), 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 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, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 12 November 2021. The Credit Ratings/Outlook were last updated on 7 June 2023.

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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