Nordic Credit Rating (NCR) said today that it had revised its outlook on Sweden-based property manager Heba Fastighets AB (publ) to negative from stable. At the same time, the 'BBB+' long-term and 'N3' short-term issuer ratings on Heba were affirmed. The 'BBB+' senior unsecured issue ratings were also affirmed.
Rating rationale
The outlook revision reflects Heba's comparatively high sensitivity to rising interest rates, which will likely contribute to its net interest coverage ratio falling substantially over the next few quarters. In our base case, we expect the company's interest coverage to fall towards 3x by year-end 2022 and 2x by year-end 2023, from 4.4x in mid-2022. Although this key credit metric is unrelated to any covenants on outstanding debt, we would view such deterioration, if it occurs, as indicative of a weakened financial risk profile.
Heba's sensitivity to rising interest rates stems from the company's low current and previous funding costs. Furthermore, the regulated rents for Swedish residential properties (which account for some 80% of Heba's rental income) mean that rent levels are likely to lag behind the rate of inflation, putting additional pressure on interest coverage.
On a positive note, we expect Heba's business risk profile to remain strong and believe the company could take measures to support its financial risk profile. For instance, it could postpone investments or divest properties, thereby reducing leverage. We regard refinancing risk as relatively low over the next 12 months because outstanding commercial paper is backed by unused credit facilities and the company's next bond maturity is not until September 2023.
In response to reduced investor demand for commercial paper in general, Heba increased its share of secured financing in the second quarter of 2022. If the company's unsecured debt as a proportion of total debt remains below 50% over a protracted period, it could affect our view of recovery prospects for senior unsecured bondholders and, consequently, our issue ratings.
Negative outlook
The negative outlook reflects our expectations of a weakened financial risk profile as interest rates rise and interest coverage falls. We could lower the rating to reflect a weakened net interest coverage ratio in line with our expectations. We could also lower the rating to reflect the net loan-to-value ratio exceeding 50% over a protracted period or to reflect increasing refinancing risk on the back of worse financing conditions. We could revise the outlook to stable to reflect net interest coverage exceeding our expectations, possibly due to interest rates stabilising at lower levels than we foresee, or if the company takes action to support its financial risk profile.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB+ | BBB+ |
| Outlook: | Negative | Stable |
| Short-term issuer credit rating: | N3 | N3 |
| Senior unsecured issue rating: | BBB+ | BBB+ |
Contacts:
Marcus Gustavsson, analyst, +46700442775, marcus.gustavsson@nordiccreditrating.com
Ylva Forsberg, analyst, +46768806742, ylva.forsberg@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Rating Methodology published on 18 Feb. 2022, NCR's Group and Government Support Rating Methodology published on 18 Feb. 2022 and NCR's Rating Principles published on 24 May 2022. For the full regulatory disclaimer please see the rating report.