Nordic Credit Rating (NCR) said today that it had affirmed its 'BBB-' long-term issuer rating on Sweden-based real estate company LSTH Svenska Handelsfastigheter AB (publ) (Svenska Handelsfastigheter). The outlook is stable. At the same time, NCR affirmed the 'N-1+' short-term rating.
Rationale
The affirmation follows a bid by Svenska Handelsfastigheter on 13 Apr. 2021 to acquire Swedish real estate manager Tre Kronor Property Investment AB (publ) (Tre Kronor). Tre Kronor has a focus on retail properties with non-cyclical retail tenants, such as grocery stores and Sweden's national alcohol monopoly, Systembolaget. The target company had a property portfolio valued at SEK 2.8bn as of end-2020, with 150 properties in Sweden and Norway. Should the proposed acquisition succeed, the value of Svenska Handelsfastigheter's property portfolio would increase to over SEK 13bn.
The affirmation reflects our view that a successful acquisition would virtually double the number of properties under Svenska Handelsfastigheter's management and increase the proportion of non-cyclical tenants within the portfolio to 50% from 40%. The acquisition would also increase the company's geographic diversity within Sweden and add non-cyclical retail properties in Norway.
The proposed financial details of the transaction have not been made public. Assuming that Svenska Handelsfastigheter utilises debt to fund the acquisition, we would expect its NCR-adjusted loan-to-value (LTV) ratio to increase to slightly over 60% in the short term, compared with 48% at end-2020. However, we believe the owners are committed to restoring the ratio below the company's financial target threshold of 60%.
Outlook
The stable outlook reflects our expectation that Svenska Handelsfastigheter will bring LTV back towards our previous estimate of 55%, or below, either through divestment of non-core properties and/or an equity injection. It further reflects Svenska Handelsfastigheter's predictable cash flows, which are mostly generated by long-dated contracts linked to the Swedish consumer price index. We expect most tenants to show continued resilience to ongoing economic challenges. We could raise the rating to reflect further diversification and/or increases in non-cyclical tenant numbers while maintaining leverage metrics within financial targets. We could lower the rating should the company fail to restore LTV in line with our expectations by end-2021, or if there is a change in the ownership structure.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB- | BBB- |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N-1+ | N-1+ |
If you have any questions, please contact:
Mille O. Fjeldstad, credit rating analyst, +4799038916, mille.fjeldstad@nordiccreditrating.com
Marcus Gustavsson, credit rating analyst, +46700442775, marcus.gustavsson@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Methodology published on 14 Aug. 2018 and NCR's Rating Principles published on 16 Sep. 2019. For the full regulatory disclaimer please see the rating report.