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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 Stable from Negative. The company’s senior unsecured debt rating has been affirmed at BBB-, as has the S-3 rating of its short-term debt.

The revision of the Outlook back to Stable reflects the easing of pressure on Compactor's real estate holdings. The gross asset values of its holdings have recovered and uncertainty about the ability to pay dividends - Compactor's main source of income - has diminished.

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

Key rating drivers

Business risk profile: BB+. Compactor’s business risk 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, DNB, Ericsson 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 97% of holdings by gross asset values that generate income. The company is highly exposed to its three core holdings Fastpartner (BB/Positive), SBB i Norden (CCC/Stable) and H&M (those representing more than 5% of gross asset value; Atrium Ljungberg was sold down). 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 86% of net asset value and 55% of expected recurring income in 2024. While this concentration holds back the rating, the more diverse industry spread and good tenant quality of its underlying holdings act as a mitigant.

Financial risk profile: BBB. Compactor's financial risk profile benefits from resilient total cost coverage*, which remains at or above 1.3x despite a downturn in property markets that has led to significant dividend cuts and dividend deferrals at core holdings. The core holding SBB i Norden has paid its deferred dividends in June 2024 and Scope does not expect any future cash dividends to be paid to Compactor. The still strong cost coverage is driven by recurring cash flow from core holdings relative to costs, consisting of very limited overheads of around SEK 1m, tax payments, a SEK 80m dividend to shareholders (which could be reduced; and has been retained on the balance sheet in 2023), and declining interest costs related to current interest-bearing debt of SEK 845m at August 2024. Scope considers Compactor's total cost coverage to be highly resilient to a reduction in revenue streams. In a hypothetical scenario stress test, mandatory costs (excluding dividends) are still covered by 1x, reducing dividends from its two real estate core holdings. The company's relatively low Scope-adjusted LTV starting point, which was 8% at the end of 2023, fell to 6.4% in August 2024, as Swedish property shares and share prices in general improved in the first half of 2024. Compactor's financial policy is to reduce the LTV, which the company is actively pursuing by reducing its debt burden. Interest-bearing debt was reduced in September 2023 through the redemption of SEK 650m of a SEK 1bn bond, and again through the refinancing of a SEK 600m bond maturing in September 2024 (called in July 2024) with a SEK 500m bond. Against this backdrop, the Scope-adjusted LTV is expected to remain below 10% in the future. Compactor's carefully managed LTV is considered credit positive by Scope, demonstrating its conservative risk profile.

Scope recognises that Compactor has very low leverage and flexibility to adjust total costs (lean cost structure and scope to adjust dividend payout). Both the cost structure and the payout are important levers to manage total cost coverage and maintain it above 1x in the event of a shortfall in recurring dividend income.

Liquidity: adequate. Scope assesses Compactor's liquidity as adequate given: i) the positive Scope-adjusted free operating cash flow of SEK 170m forecast for 2024; ii) the undrawn portion of credit facilities of SEK 590m; iii) unrestricted cash of SEK 452m; iv) a highly liquid portfolio of blue-chip equities that could be liquidated at short notice of SEK 1.9bn as at the end of June 2024. Short-term debt of SEK 600m with original maturity in September 2024 has already been repaid in July 2024, the remaining SEK 97m is covered by sources.

Supplementary rating drivers: credit-neutral. Scope has made no adjustments related to financial policy, peer group considerations, parent support, or governance and structure.

Outlook and rating sensitivities

The Outlook for Compactor has been revised to Stable as risks related to Compactor's core Swedish commercial real estate holdings have diminished somewhat with a falling interest rate curve. The Outlook further incorporates Scope’s expectation that the company will maintain a total cost coverage of around 1.3x and will not engage in debt-financed increases in shareholdings.

The upside scenario for the ratings and Outlooks is:

1. A positive rating action is remote but could be warranted if the company’s holdings diversified towards a larger share of non-commercial real estate.

The downside scenario for the ratings and Outlooks is:

1. Total cost coverage deteriorated towards 1.0x on a sustained basis.

Debt ratings

At the end of July 2024, Compactor had SEK 845m in senior unsecured bonds outstanding. The senior unsecured debt rating is affirmed at BBB-, the same level as the issuer rating.

The S-3 short-term debt rating is based on the BBB-/Stable issuer rating and supported by adequate liquidity, good banking relationships and adequate access to diverse funding sources.

Environmental, social and governance (ESG) factors

Compactor's ESG focus aligns with that of its core holding Fastpartner: on the real estate side, the company invests in holdings that seek to enhance the value of its real estate portfolio through reduced emissions and high levels of renewable energy, thereby increasing the attractiveness of its properties to existing and potential new customers, and ensuring continued high occupancy and related cash flows that provide Compactor with stable income. The same principles, adapted to the relevant industries, are applied to its non-real estate holdings.

Overall, ESG factors have no impact on this credit rating action.

All rating actions and rated entities

Compactor Fastigheter AB

Issuer rating: BBB-/Stable, Outlook change

Senior unsecured debt rating: BBB-, affirmation

Short-term debt rating: S-3, 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, (General Corporate Rating Methodology, 16 October 2023; Investment Holding Companies Rating Methodology, 17 May 2024), 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 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: Eugenio Piliego, Senior 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 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, 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
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