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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Fastpartner AB to BB/Negative from BBB-/Stable. The company’s senior unsecured debt rating has been downgraded to BB from BBB-, as has the short-term debt rating to S-3 from S-2.

Rating rationale

The downgrade reflects Fastpartner’s deteriorating interest cover, given almost full exposure to floating rate debt. At Q2 2023, interest cover stood at 2.5x but is expected to deteriorate towards 1.8x in 2024. The Negative Outlook reflects the pressure on interest cover which diminishes the headroom to secured bank debt covenants.

Fastpartner’s business risk profile (assessed at BBB-) benefits from its market position in the Swedish real estate market with Scope-adjusted total assets of SEK 36.8bn (EUR 3.1bn) and a total lettable area of 1.6m sq m as of end-June 2023. Its visibility in the market supports access to funding, demonstrated by regular issuances in debt and equity capital markets, which have continued during a challenging 2023. Fastpartner’s strongest foothold is in Stockholm, with additional exposure to Malmö, Gothenburg and Southern Sweden.

Tenant diversification remains moderate, with the top three tenants accounting for 9% and the top 10 for 18.6% of rental income as at Q2 2023. 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 4.5 years as at Q2 2023, 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 2023. 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 historic 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 93.3% as at Q2 2023 (latest reading), which demonstrates a change in strategy and the quality of assets. Over the medium term, 94% is targeted through this strategy (since 2020) of focusing on managing existing assets. The previous strategy was oriented towards growth.

Fastpartner’s financial risk profile historically benefited from a moderate leverage as measured by a loan-to-value (LTV) ratio below 50% and strong debt protection of above 3x. While the loan-to-value ratio remains intact below 50% despite fair value depreciations observed on its asset base, the exposure to predominantly floating rate debt had seen its interest cover ratio tumble in light of the fast and significant rises in central bank rates. While interest cover still stood at 3.5x at year-end 2022, Scope has observed a deterioration to 2.5x the last 12 months as of Q2 2023 and expects a further deterioration towards 1.8x into 2024. The latter has driven the reassessment of its financial risk profile to BB by Scope.

Fastpartner hedged only 12% of its debt exposure at Q2 2023, leaving the remainder exposed to 3-month Stibor, which moves broadly in line with the Swedish central bank rate. A such, the company’s average cost of debt has dramatically increased over the last 12 month to 4.9% as of Q2 2023, a rate Scope expects to increase further before peaking at year-end 2023. The low hedging ratio is a conscious decision of Fastpartner’s management which they do not intend to change as they see themselves in a position to weather this storm thanks to strong cash flow generation and they foresee a relatively quick return to more modest interest rates during 2024 with the related recovery in the interest rate cover ratio. Scope forecasts a more prolonged period of higher interest rates throughout 2024, which results in interest cover deteriorating to 1.8x despite the positive effect of inflation-linked rents on EBITDA. In Scope’s forecast, central bank rates will ease in 2025, providing relief to Fastpartner’s interest cover ratio. That deterioration of interest cover drastically reduces Fastpartner’s headroom to bank covenants and Scope understands that Fastpartner is in discussions with banks to address the reduced headroom.

Given the current market sentiment, Fastpartner is turning to secured bank financing to refinance maturing unsecured bond financing, which could potentially benefit the interest cover ratio as observed bank spreads are below some of its maturing bonds.

Fastpartner’s leverage as measured by its Scope-adjusted loan-to-value ratio has been relatively stable over the last 12 months, increasing slightly from 45% to 48% as at end-June 2023, mostly due to fair value adjustments as the portfolio remained stable. Scope expects the loan-to-value ratio to remain below 50%, in light of small declines in fair values countered by continuous debt repayment. Leverage as measured by Scope-adjusted debt/EBITDA has declined to 12.3x as of Q2 2023 from 13.5x a year before thanks to the aforementioned repayments of debt. The ratio is expected to decrease slightly going forward based on expected EBITDA growing while Scope-adjusted debt is expected to continue to decline.

Fastpartner’s liquidity is adequate given that sources (SEK 180m in cash and SEK 2.2bn in committed undrawn credit lines as at Q2 2023 as well as SEK 400m in free operating cash flow forecasted for the next 12 months) cover uses (SEK 1.7bn in short-term debt as at Q2 2023) by about 1.6x for the next 12 months. On Scope’s calculations, all upcoming maturities until May 2025 can be covered by available cash, committed credit lines and internal cash flow generation. 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 29% on secured debt, providing ample headroom to increase debt on existing secured debt; and ii) the company’s continued access to capital markets as demonstrated by commercial paper and its good banking relationships with a wide range of potential funding sources. Scope highlights the maturity wall upcoming in May 2025 and expects the company to take measures to address this risk well in advance.

Fastpartner’s efforts in high-grading its portfolio by reduced emissions, and the usage of 100% renewable energy is a requirement for some multinational tenants and a desirable feature for the remainder, which increases the appeal of its properties to existing and potential new clients and assures a continued high occupancy and related cash-flows also in a potentially softer economic environment and/or changing demand patterns.

Outlook and rating-change drivers

The Outlook for Fastpartner has been revised to Negative, taking into account the expected pressure on the interest coverage ratio as the company is predominantly exposed to floating rate debt. Scope expects the interest coverage ratio, which was last at 2.5x in Q2/23, to fall below 2.0x by the end of 2023 due to the rising interest rate environment which is likely persisting at elevated levels throughout 2024. Such levels reducing headroom to bank covenants, which if touched might result in waiver fees or forced sales of properties to amortise loans. Scope understands that Fastpartner is in active discussions with the banks to proactively address the tightness of covenants. In addition, the Negative Outlook reflects further downward pressure on the leverage ratio, as capitalisation rates could widen beyond Scope's expectations and the Scope-adjusted loan-to-value ratio could rise above 50%.

A negative rating action could occur if Fastpartner’s leverage, as measured by its LTV, reached 50% or above on a sustained basis, or if Scope-adjusted EBITDA interest cover weakened below 1.8x. This could be driven by an unfavourable remortgaging of existing debt or base interest rates rising further than currently forecasted by Scope. A more pronounced downward adjustment in the company’s asset value than expected could affect the LTV trigger. Deteriorating headroom to bank covenants without amending those could also trigger a negative rating action.

A positive rating action (i.e. a revision of Outlook to Stable) could be warranted if interest coverage does not permanently fall below 1.8x and LTV remains below 50%. An upgrade could be warranted if interest coverage recovers sustainably above 2.2x over the forecast horizon or if debt reduction leads to an LTV of around 40%, supported by a tightened financial policy. This could be achieved by deleveraging, e.g. an equity increases and/or interest base rates in Sweden abating faster than anticipated by Scope.

Long-term and short-term debt ratings

Fastpartner currently has SEK 6.6bn of senior unsecured debt outstanding, which comprises SEK 375m in commercial paper and SEK 6.3bn in senior unsecured bonds (of which SEK 5.2bn was issued under its green framework). These senior unsecured obligations benefit from a property pool of SEK 9.3bn in truly unencumbered assets in addition to SEK 5.0bn in unencumbered parts of secured properties (with a difference of secured LTV up to 60%). Scope assesses the pool of unencumbered assets at SEK 14.4bn, which provides around 220% coverage by unsecured assets. 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, Scope highlights the high sensitivity of recovery expectations to advance rates and 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-.

The S-3 short-term debt rating is based on the BB/Negative issuer rating and supported by adequate liquidity, good banking relationships, and access to secured bank and commercial paper 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, (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 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 Outlooks 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 31 August 2020. The Credit Ratings/Outlook were last updated on 7 September 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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