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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating of Samhällsbyggnadsbolaget i Norden AB’s (SBB) at CCC and assigned a Stable Outlook. Concurrently, the senior unsecured debt rating has been affirmed at CCC, the subordinated (hybrid) debt rating at C and the short-term debt rating at S-4. Consequently, the under-review status for a developing outcome on the ratings were resolved.

Scope has obtained sufficient clarity on the implementation of SBB’s strategic review process to resolve the under-review status. The recent tender exchange offer is seen as opportunistic and not distressed by Scope, and thereby has limited impact on the ratings.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Scope has resolved the under review status for SBB’s ratings as the agency foresees a prolonged period of SBB de-structuring its balance sheet, during which the company is expected to be able to repay its capital market debt but remain dependent on rolling over bank debt. Scope has gained comfort that SBB is progressing on its strategic review, though on a slow pace, addressing its structural and refinancing challenges step-by-step. The recent dissolution of its Unobo AB JV and SBB Kåpan Bostad AB JV, in addition to listing Public Property Invest demonstrates such structural changes that will ultimately provide a clearer structure for investors. To the contrary Scope views the recent transaction with Castlelake as a transaction to the detriment of SBB’s strategy, though Scope understands the company’s needs to generate liquidity in the absence of capital market access.

On 28 June 2024 SBB announced the result of a voluntary tender exchange offer for a number of outstanding euro- and SEK-denominated senior unsecured and hybrid debt instruments up to a maximum exchange amount of SEK 2.5bn in new bonds (80%) and cash (20%). The tender offer was conducted as an unmodified Dutch auction. The acceptance of tendered instruments and the total amount used was at the sole discretion of SBB. The company accepted predominantly senior unsecured bonds due in 2027 matching the maturity of the newly to be exchanged-into bonds, as well as perpetual hybrid bonds with reset dates in 2025 and 2026, in addition to some minor position of 2025-2029 bonds. SBB accepted securities totalling approximately SEK 3.9bn (EUR 340m).

SBB does not disclose the accepted purchase price of each instrument but given an average discount of around 40% across all instruments, Scope has reason to believe that most instruments were repurchased at a significant loss of value relative to the original debt terms. Scope understands that the hybrid instruments were repurchased at significantly higher discounts than the senior unsecured bonds, demonstrating the loss-absorbing nature of such instruments, which were granted with a 50% equity credit by the agency.

Scope views the transaction as opportunistic rather than distressed, as the agency does not view it as having been undertaken to avoid a likely default in the short to medium term. The senior unsecured bonds accepted in the tender are predominantly long-dated and hybrid debt instruments to not have a repayment obligation. SBB is therefore not retiring short-term debt at a significant discount that might indicate a distressed debt exchange. In addition, the bondholders that were accepted in the tender are receiving access to a defined security pool at Sveafastigheter (Swedish rent-regulated residential real estate), and the new bonds have a more stringent LTV covenant (maximum net LTV of 55%) than the exposure to SBB currently provides.

Business risk profile: BBB (revised from BBB+). SBB's business risk profile continues to be supported by its market positioning, although its reduced size has reduced its dominance in its target segments and visibility to tenants, while the concentration of tenants, properties and geographies has increased somewhat. Asset quality remains supportive, although headline figures for WAULT (7 years as at end-March 2024, down 3 years YoY) and occupancy (94%, down 2pp YoY) have declined following the deconsolidation of the Education portfolio. Profitability has suffered from additional costs linked to the balance sheet restructurings and future stabilised profitability levels are uncertain.

Financial risk profile: B- (unchanged). The Scope-adjusted loan/value ratio* was 65% at the end of 2023 and 66% as at end-March 2024, a level that Scope sees as stabilising, although highly dependent on the impact of ongoing and future transactions. EBITDA interest coverage was 1.8x at year-end 2023 and is expected to decline to 1.6x by year-end 2024. The latter benefits from SBB's high hedging ratio (interest rate hedges cover 100% of nominal debt) with an average maturity of 3.6 years, and the company's intention to repay capital market debt at maturity, thereby reducing the overall debt and interest burden.

Liquidity: inadequate. Liquidity remains insufficient as upcoming debt maturities (SEK 13.0bn in the twelve months to end-March 2025) and other cash uses (SEK 4.2bn) are not covered by cash sources (SEK 12.3bn as at end-March 2024). Liquidity remains tight and dependent on refinancing of bank debt. So far, rolling over bank debt has not been an issue. This is evidenced by SBB's reporting of outstanding bank debt over the last few quarters.

Supplementary rating drivers: -1 notch. Scope has identified a negative governance factor, which is described in the ESG section below.

Outlook and rating sensitivities

The Stable Outlook reflects Scope's view of a prolonged period of balance sheet de-structuring for SBB, during which the company is expected to be able to address repayments of its capital market debt but remains dependent on rollover of bank debt. Scope has gained comfort that SBB is progressing on its strategic review, though on a slow pace, addressing its structural and refinancing challenges step-by-step through dissolution of JVs, listing of subsidiaries, and addressing its liabilities with excess liquidity generated through transactions.

The upside scenario for the ratings and Outlooks is:

1. A significant improvement in SBB's liquidity, e.g. if planned divestment proceeds and/or refinancing can cover maturities over the next 18 months. It also requires SBB to manage its liabilities, including their restructuring, in a way that does not result in losses for SBB's creditors and would constitute a distressed debt exchange

The downside scenarios for the ratings and Outlooks are (individually):

1. A further deterioration in SBB's liquidity, e.g. the failure to roll over secured bank debt or inability to generate enough liquidity to repay upcoming capital market debt (in the absence of realistic refinancing changes of such).
    
2. Restructuring of liabilities in a way that leads to losses for debt holders and that would constitute a distressed debt exchange, though Scope considers this unlikely and has not reflected this scenario in its base case.

Debt ratings

As at 31 March 2024, SBB has outstanding senior unsecured debt of SEK 40bn. Ongoing balance sheet restructurings, including the Castlelake JV, the listing of SBB’s associate Public Property Invest AS and the potential listing of SBB's subsidiary company Sveafastigheter, have created increased uncertainty about the available assets and their encumbrances, as well as the liability structure given the preference to hybrid owners in the recent tender, in a hypothetical issuer default scenario assumed in 2025. As a result, Scope expects only an average recovery on SBB’s senior unsecured debt. Thus, the agency highlights the high sensitivity of recovery expectations to advance rates and the liability structure at the time of a hypothetical default. The average recovery expectation translates to an affirmation of the senior unsecured debt rating at CCC, in line with the issuer rating.

Outstanding subordinated (hybrid) debt amounted to SEK 11bn following the recent tender offer. Hybrid debt benefits 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 expectations for subordinated (hybrid) debt are very low resulting in and affirmation of the C debt rating.

Scope has affirmed the S-4 short-term debt rating. The rating is based on SBB’s CCC/Stable issuer rating and reflects SBB's worse than adequate liquidity and limited access to the capital markets. However, SBB still has access to banks and drawn committed credit lines with maturities of over one year.

Environmental, social and governance (ESG) factors

Scope highlights the negative governance issues (ESG factor: credit-negative) that have resulted in a negative one-notch adjustment of SBB’s standalone rating. These stem from an investigation in 2023 by the Swedish financial services authority into violations of accounting provisions linked to restatements of the 2021 annual accounts, repeated negative press and an ongoing legal dispute regarding an alleged covenant breach (which the company disputes), and the repeated restatement of quarterly reports. These issues are fuelling negative market sentiment. That is reflected in an unchanged negative adjustment of the standalone rating by one notch.

All rating actions and rated entities

Samhällsbyggnadsbolaget i Norden AB’s

Issuer rating: CCC/Stable, affirmation

Senior unsecured debt rating: CCC, affirmation

Subordinated hybrid debt rating: C, affirmation

Short-term debt rating: S-4, affirmation

*All credit metrics refer to Scope-adjusted figures.

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, 28 March 2024; General Corporate Rating Methodology, 16 October 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, 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 these 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 and/or Outlook 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 10 April 2024.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5, D-10785 Berlin.