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Rating action

Scope Ratings GmbH (Scope) has downgraded Ilija Batljan Invest AB’s (IB Invest) issuer rating to CCC/Negative from BB+/under review for a possible downgrade, senior unsecured debt rating to CC from BB+/under review for a possible downgrade and subordinated hybrid note rating to C from B+/under review for a possible downgrade.

Rating rationale

The six-notch rating downgrade is based on IB Invest’s rapidly deteriorating liquidity to inadequate and with it a heightened default risk, in addition to deteriorated governance. Recent transactions, which are partly fire sales and opportunistic acquisitions, have significantly reduced the market value of the company’s holding portfolio. As such loan-to-value has increased to 91% at end-August 2023, up from 50% at May 2023. The Negative Outlook reflects limited transparency and heightened downside risk in regard to leverage and liquidity.

According to company disclosures, IB Invest has sold itself partially or fully out of 12 holdings over the last three months, some of which are viewed as fire sales by Scope. The largest sale was the publicly disclosed disposal of Logistea, which created an inflow of SEK 290m, while Scope estimates that the remaining disposals have generated sales proceeds of around SEK 200m (not confirmed by the company). Meanwhile, IB Invest has invested part of the proceeds in SBB i Norden shares, bought independently from the private portfolio of CEO Ilija Batljan to strengthen the company’s share portfolio. The reasoning behind the transaction was to strengthen IB Invest’s portfolio: the CEO views SBB i Norden’s stock market value to be significantly undervalued as the underlying real estate asset values are a multiple of the stock market valuation. A further SEK 70m of the sales proceeds have been used for bank debt repayment. At this time, Scope does not have all the necessary data to reconcile its estimation of remaining proceeds with the disclosed portfolio.

IB Invest’s portfolio market value has suffered from a further 35% decline in SBB’s share price during the last three months (which was compounded by the 45% increase in shares acquired) and a market value decline in large parts of the portfolio, while shares increasing in value, e.g., dividend-paying banks shares, have been sold. IB Invest’s market value has therefore decreased to SEK 2.1bn from SEK 2.9bn in the last three months. Given virtually unchanged Scope-adjusted debt (which includes 50% of its hybrid debt), IB Invest’s loan-to-value ratio has increased to 91% at end-August 2023 from 50% in May 2023, with a further market slump affecting its core holding and potentially exposing the company to negative equity. Total cost coverage has slightly improved to 0.8x in 2023 due to the postponement of hybrid interest payments, and is therefore only temporary. A recovery of cost coverage in 2024 hinges on the payment of owed buy postponed dividends of SBB i Norden; and Scope does not expect SBB to resume its normal dividends given the new CEO’s public statements.

Liquidity has sharply deteriorated and has been re-assessed as inadequate. The company’s cash holdings have reduced to SEK 5m at Q2 2023, FOCF over the next 12 months is expected at SEK 100m, while SEK 126m bank debt will mature during the same period. The company might still have access to a SEK 500m loan facility, which is unconfirmed as at September 2023. In December 2024, IB Invest’s senior unsecured bond of SEK 1.34bn will mature. While the CEO has expressed preliminary plans of refinancing such bonds with secured funding or repaying them through asset liquidations, Scope questions such refinancing plans as market values of the current portfolio might not provide sufficient overcollateralisation for secured financing and a liquidation of two-thirds of the portfolio to repay a bond might result in distressed asset prices, not covering all outstanding maturities.

Given the deterioration in the portfolio that led to a significantly increased loan-to-value of 91% coupled with serious liquidity concerns, Scope has lowered IB Invest’s financial risk profile to B- from BB.

Scope highlights a significantly reduced and delayed information flow from the company with a rapid deterioration in transparency and access to management. Scope further notes IB Invest’s CEO’s personal attachment to the core holding SBB i Norden, which has translated into a market value destruction for IB Invest. While Scope understands his role as the founder of SBB i Norden and his continued involvement as a board member, such attachment has culminated in opportunistic trades that are not in the best interests of IB Invest’s stakeholders, raising a serious governance issue. That is reflected in a negative adjustment of the standalone rating by one notch.

Outlook and rating-change drivers

The Outlook is Negative and reflects heightened downside risk to the market value of the company's portfolio in addition to deteriorating liquidity. It anticipates that future asset sales at IB Invest might be done under pressure to achieve liquidity, which could result in impaired proceeds of such disposals.

A downgrade could occur if IB Invest’s liquidity deteriorates further which might eventually lead to default implications. This could be the result of maturing debt or interest payments having to be covered by fire sales, further eroding the market value of the remaining portfolio.

A positive rating action with an Outlook back to Stable could be achieved if the company’s liquidity situation eases and concerns abate. An upgrade is currently seen as remote.

Long-term and short-term debt ratings

As of Q2 2023, IB Invest has SEK 126m in unsecured bank debt (ranking structurally ahead of the senior unsecured bonds) in addition to SEK 1.34bn in outstanding senior unsecured bonds. Those rank ahead of the SEK 750m in subordinated perpetual floating-rate callable capital notes.

Scope has re-performed the hypothetical default scenario for 2024 to account for the deterioration in SBB’s and other holdings’ share prices over the last few months and the uncertainty attached to SBB’s strategic review. Scope arrives at an ‘average’ recovery for senior unsecured debt but highlights a high sensitivity to changes in underlying assumptions, translating in a one notch lower assessment of the debt class compared to the issuer rating. Senior unsecured debt is thereby downgraded to CC.

The same applies to the recovery assessment of the subordinated perpetual floating-rate callable capital notes, whose negligible recovery has led to a rating two notches below the issuer rating. The accumulated interest on the coupon deferral is also detrimental to the recovery assessment. Scope has downgraded the contractually deeply subordinated notes with hybrid characteristics to C from B+.

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: Olaf Tölke, Managing Director
The issuer and senior unsecured debt Credit Ratings/Outlook were first released by Scope Ratings on 28 May 2021. The Credit Ratings/Outlook were last updated on 7 June 2023.
The subordinated debt (hybrid) Credit Rating was first released by Scope Ratings on 1 June 2021. The Credit Rating was 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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