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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB- issuer rating of Compactor Fastigheter AB and changed the Outlook to Negative from 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 affirmation reflects Compactor’s stable operations and Scope’s assessment of the business risk profile (at BB+) and of the good financial risk profile (at BBB) while the change of Outlook reflects the exposure to Swedish commercial real estate holdings which are under significant pressure on credit quality. The financial risk profile benefits from a total cost coverage of 1.3x in 2023 and for the next 2-3 years as well as 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 and SBB i Norden have been strongly affected by rising interest rates, declining asset prices and pressure on their financial metrics. Fastpartner has therefore cut its dividend for 2022 in half, while SBB i Norden postponed half of its 2022 dividend payments until 2024. Thus Compactor’s income base has significantly diminished over the last 12 months.

Compactor’s business risk profile (assessed at BB+) 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, namely H&M, Swedbank, Handelsbanken, Volvo and Atrium Ljungberg. 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 number of income-generating core holdings, mitigated by the 96% of holdings by gross asset values that generate income. The company is highly exposed to its four core holdings (those representing more than 5% of gross asset value). Compactor’s recurring income is also heavily biased towards the Nordic countries with 81% coming from there, with only few of its holdings being active on a global scale. 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 economic slowdown. Compactor also has a high industry concentration with commercial real estate reflecting 83% of net asset value and 67% of expected recurring income in 2023. 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 a resilient total cost coverage, which, despite significant dividend cuts at core holdings. remains at or above 1.3x. This factors in the uncertainties at its core holding SBB i Norden, which Scope has chosen to conservatively reflect by not accounting for future cash dividends paid to Compactor. The still strong cost coverage is driven by recurring cash flow from its core holdings in relation to costs, consisting of the very limited overhead costs of around SEK 1m, tax payments, a SEK 80m dividend to shareholders (which could be cut) and rising interest costs related to a current interest-bearing debt of SEK 1.6bn at Q2 2023. Scope considers Compactor’s total cost coverage to be highly resilient to a reduction in income streams. In a stress test in a hypothetical scenario, mandatory costs (excluding dividends) are still covered by 0.9x when taking out recurring dividends of its two core holdings. The company’s relatively low Scope-adjusted LTV starting point that stood at 12.4% at end-2022 increased given the sell-off in Swedish real estate shares in H1 2023. Compactor’s financial policy stipulates a reduction in the loan-value ratio and therefore the company intends to repay the upcoming SEK 1bn bond maturing in September 2023. Interest-bearing debt will thereby be reduced to SEK 600m, which will take Scope-adjusted LTV below 10% post-repayment. Compactor’s carefully managed LTV is seen as a credit-positive by Scope, which demonstrates its conservative risk profile.

Scope acknowledges Compactor has very low leverage and enjoys greater flexibility in adjusting overall costs (lean cost structure and room to adjust dividend payout). Both represent a great lever to survive years without a dividend income - a scenario that is currently considered unlikely but not excluded.

Scope assesses Compactor’s liquidity as adequate given: i) the positive Scope-adjusted free operating cash flow of SEK 660m forecasted for 2023; ii) the undrawn portion of loan facilities worth SEK 590m; iii) SEK 191m of unrestricted cash (as at Q2 2023; since then it has increased above SEK 800m from a portfolio rebalancing); iv) a highly liquid portfolio of blue-chip shares that could be unwound at short notice worth SEK 1.4bn as at end-June 2023. Short-term debt of SEK 1bn is to be repaid at maturity in September 2023.

Outlook and rating-change drivers

The Outlook for Compactor has been revised to Negative as risks related to Compactor's core Swedish commercial real estate holdings remain. The holdings are under significant pressure on credit quality, mainly due to higher exposure to floating rate debt or shorter debt maturities, making them reliant on debt rollovers. This could lead to higher volatility in the gross asset value of Compactor’s portfolio, increasing the likelihood of an increase in the Scope-adjusted loan/value, as well as pressure on the company’s recurring earnings. The Outlook further incorporates Scope’s expectation that the company will not engage in debt-financed increases in shareholdings and repays its SEK 1bn bond in September 2023 from available cash.

A negative rating action would be possible if Compactor’s total cost coverage deteriorated towards 1.0x on a sustained basis. This could be the result of a further reduced dividend of its main holding Fastpartner, or a reduction of dividends from its other holdings without a cut of dividends at Compactor’s level to balance such shortcomings.

A positive rating action (i.e. a revision of the Outlook back to Stable) could be justified if the total cost coverage does not deteriorate towards 1x. This could be due to easing pressure on Compactor's core holdings of Swedish commercial real estate companies, which ensure a constant level of recurring income. A positive rating action could also be the result of a diversification of the company's holdings towards a larger share of non-commercial real estate. This could be the result of a more granular investment portfolio, either through organic growth of its non-commercial real estate exposure or a reshuffle of investments.

Long-term and short-term debt ratings

At the end of Q2 2023, Compactor had SEK 1,600m in senior unsecured bonds outstanding, of which SEK 1,000m is maturing in September 2023 and is intended to be repaid in full with cash on the balance sheet. The senior unsecured debt rating is affirmed at BBB-, the same level as the issuer rating.

The S-3 short-term debt rating is supported by adequate liquidity, good banking relationships and adequate access to diverse funding sources.

*. Editor's note: on 8 September 2023 we have amended the rating level. In the initial publication the rating level was BBB.

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; Investment Holding Companies Rating Methodology, 19 May 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 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 10 September 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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