Nordic Credit Rating (NCR) said today that it had lowered its long-term issuer rating on Sweden-based Heba Fastighets AB (publ) to 'BBB' from 'BBB+'. The outlook is negative. The 'N3' short-term rating was affirmed. At the same time NCR lowered the senior unsecured issue rating to 'BBB' from 'BBB+'.
Rating rationale
The rating action on the long-term issuer rating reflects a decline in Heba's financial metrics due to rising interest rates and lower property values. Heba's interest coverage ratio fell throughout 2022 and was 3.2x for the full year 2022 (from 4.6x in 2021), compared with our expectation of approximately 3x in September 2022. Furthermore, the NCR-adjusted net loan-to-value (LTV) ratio rose significantly to 47.8% at year-end 2022, compared with our previous projection of 43.7%.
Without measures to support the financial profile, we expect credit metrics to decline further. We project the company's average interest rates will continue to rise, pushing interest coverage ratios, excluding one-off items, below 2x in 2024 and 2025. In 2023 and 2025, however, Heba's debt servicing ability is likely to be supported by one-off payments from joint ventures. Due to the regulated rental market, Heba has limited ability to raise rents in line with interest and other cost increases. Earnings are, however, supported by the 20% of rental revenue stemming from inflation-linked contracts, higher-than-usual rent increases for residential properties, and by hedged electricity costs. We also project that LTV will rise as residential property values decline amid increasing yields. This will put further pressure on the long-term rating if the company is unable to remain in line with its financial policy target of maintaining LTV below 50%.
Heba has drastically reduced its project exposure and proposed a reduced 2022 dividend to support its credit metrics. In addition, the company has continued to hedge interest rates on a large portion of its interest-bearing debt. We expect the company to make further efforts to maintain its financial policy targets. As projects are finalised and new developments put on pause, we expect both project risk and joint venture exposure to remain low in the coming years. We expect Heba's business risk profile to remain strong, and the rating continues to reflect the company's long and stable history of managing residential rental properties in Stockholm, Sweden's highest-demand housing market. It also reflects Heba's low refinancing risk, due to its extensive credit facilities and the company's historically moderate financial risk appetite.
Tight capital markets and higher interest rates have led Heba to replace unsecured financing with a higher share of secured bank financing. If the company's unsecured debt as a proportion of total debt remains below 50% over a protracted period (43% at year-end 2022), it could affect our view of recovery prospects for senior unsecured bondholders and, consequently, our issue ratings.
Negative outlook
The negative outlook reflects our expectation that, barring any significant action taken by the company, metrics will likely weaken in line with our forecast. Pay-outs from joint ventures support our forecast, and we believe there is further potential for the company to take measures to outperform our base case. Nonetheless, the risk of further interest rate hikes in Sweden remains, and we expect property values to decline as yield requirements increase, adding pressure on the company's ability to maintain metrics within its financial policy. However, we remain uncertain as to the extent and timing of changes in property values.
We could lower the rating to reflect an NCR-adjusted interest coverage ratio below 2.2x or NCR-adjusted net LTV above 55% for an extended period. We could also lower the rating to reflect an increasing refinancing risk as a result of worse financing conditions, or in the event of significant issues with joint-venture partners, affecting Heba's one-off payments and financial commitments.
We could revise the outlook to stable if the NCR-adjusted interest coverage ratio remains above 2.2x, excluding one-off payments, and NCR-adjusted net LTV remains below 50% for an extended period. We could also the revise the outlook to stable to reflect action taken by the company to support its financial risk profile.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB | BBB+ |
| Outlook: | Negative | Negative |
| Short-term issuer credit rating: | N3 | N3 |
| Senior unsecured issue rating: | BBB | BBB+ |
Contacts:
Ylva Forsberg, analyst, +46768806742, ylva.forsberg@nordiccreditrating.com
Yun Zhou, analyst, +46732324378, yun.zhou@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.