Nordic Credit Rating said today that it had revised its outlook on Sweden-based property manager Bonnier Fastigheter AB to negative from stable. The outlook on subsidiary AB Bonnier Fastigheter Finans (publ) was also revised to negative from stable. At the same time, the 'BBB' long-term and 'N3' short-term issuer ratings on both the parent and the subsidiary were affirmed. The 'BBB' senior unsecured issue ratings on instruments issued by AB Bonnier Fastigheter Finans (publ) were also affirmed.
Rating rationale
The outlook revision reflects our expectation that Bonnier Fastigheter's credit metrics will weaken over the next few years as a result of continued portfolio growth combined with rising interest rates and a likely decline in asset values. We expect the company to continue to build a SEK 25bn property portfolio (including JV exposures) by 2025, despite more challenging market conditions. To reflect rising interest rates and rapid portfolio growth, we have revised our expectations for net interest coverage in 2023 to 3.1x from 5.5x a year earlier. In addition, we have increased our projections for net loan to value (LTV) in 2023 to 39% from 33% a year earlier to reflect higher net debt than previously expected.
We believe that the likely resulting increase in financial risk will be accompanied by a stronger business risk profile but that the net effect will be credit negative. Positively, we believe that Bonnier Fastigheter is better equipped than most of its domestic peers to adapt to deteriorating market conditions thanks to its strong balance sheet.
As of 31 Aug. 2022, 53% of Bonnier Fastigheter's debt was unsecured. If secured debt were to account for more than 50% of outstanding debt and, at the same time, net LTV were to increase above 40%, our view of recovery prospects for senior unsecured bondholders and, consequently, the issue ratings could be negatively affected.
Negative outlook
The negative outlook reflects our expectations that Bonnier Fastigheter's credit metrics will weaken from currently strong levels as the company pursues a portfolio value target of SEK 25bn by 2025. We expect rising interest rates and a probable decline in asset values to increase financial risk. However, we also expect that any weakening in the company's financial position will be mitigated by a stronger business risk profile due to a larger and less concentrated property portfolio, possibly with meaningful residential exposure. Nevertheless, we view the net effect as broadly credit negative.
We could lower the long-term issuer ratings to reflect weakened credit metrics, including net LTV above 35% and net interest coverage below 3.5x over a protracted period, or deteriorating market fundamentals that negatively affect profitability and/or occupancy.
We could revise the outlook to stable to reflect continued strong credit metrics, including net LTV below 35% or net interest coverage above 3.5x over a protracted period. We could also revise the outlook to stable to reflect an increased proportion of residential properties under management, combined with reduced growth ambitions and stronger credit metrics.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB | BBB |
| Outlook: | Negative | Stable |
| Short-term issuer credit rating: | N3 | N3 |
Contacts:
Marcus Gustavsson, analyst, +46700442775, marcus.gustavsson@nordiccreditrating.com
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Rating Methodology published on 18 Feb. 2022, NCR's Rating Principles published on 24 May 2022 and NCR's Group and Government Support Rating Methodology published on 18 Feb. 2022. For the full regulatory disclaimer please see the rating report.