Nordic Credit Rating (NCR) said today that it had affirmed its 'BBB-' long-term issuer rating on Sweden-based LSTH Svenska Handelsfastigheter AB (publ). The outlook is stable. At the same time NCR affirmed the 'N3' short-term rating.
Rating rationale
The affirmation of the long-term rating reflects our view that Svenska Handelsfastigheter's financial risk profile is likely to remain robust due to the company's satisfactory interest-rate fixing, improved earnings capacity and suspension of dividends. We believe that the owners have improved the company's financial flexibility and ability to act on potential investment opportunities without increasing financial risk. We also believe they are committed to maintaining the net loan-to-value (LTV) ratio below 50%.
We have raised our assessment of the company's financial risk profile due to reflect its commitment to lower leverage and a recent revision of its capital structure. Preference shares held by institutional owners were converted into common equity in early 2024. We believe that the new capital structure reduces barriers to accessing new equity in a timely fashion and improves transparency. In our view, further downward pressure on property values is unlikely due to the healthy yield gap of the company's assets and a widening of its yield requirements by 125bps over the past 18 months. We expect the owners to provide equity to maintain net LTV targets if property values fall.
The long-term rating reflects Svenska Handelsfastigheter's large proportion of non-cyclical tenants, diverse property portfolio, long remaining average lease terms, high occupancy levels, and low refinancing risk. The rating also reflects the stable operating environment and the company's comparatively strong cash flow generation compared with other property managers. We take a positive view of recent equity issues and the owners' more pronounced management role through increased board participation.
The rating is constrained by Svenska Handelsfastigheter's moderately high, but stable, leverage as we expect the value of the company's properties to be more resilient than those of its peers. The rating is further constrained by the relatively small size of the company's portfolio, which includes a high proportion of customised properties outside city centres. Although these properties encourage tenant loyalty, they have a higher risk of lengthy vacancies if contracts are not renewed.
Stable outlook
The stable outlook reflects our expectation that Svenska Handelsfastigheter will maintain its financial risk profile and improve its cash flow generation. The company is well equipped to meet upcoming debt maturities and has satisfactory interest hedging arrangements, making its interest coverage ratio more stable than those of its peers. The outlook incorporates our expectation that Svenska Handelsfastigheter will continue to pursue a higher proportion of less cyclical tenants. In addition, it reflects the portfolio's resilience to the negative effects of e-commerce and the declining discretionary purchasing power of consumers.
We could raise the rating to reflect improved credit metrics (LTV below 40% and net debt/EBITDA below 9x over a protracted period). We could also raise the rating if the company were to increase the proportion of non-cyclical tenants and increase the size and diversity of its portfolio. The rating could also be raised to reflect a strengthened long-term ownership structure and owner commitments.
We could lower the rating to reflect a deterioration in credit metrics (net LTV above 55% and EBITDA/net interest below 2.2x over a protracted period). The rating could also be lowered if the company pursues a higher proportion of cyclical tenants or market fundamentals deteriorate and negatively impact profitability and/or occupancy. The rating could also be lowered to reflect an adverse change in the ownership structure and owner commitments.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB- | BBB- |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N3 | N3 |
Contacts:
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com
Yun Zhou, analyst, +46732324378, yun.zhou@nordiccreditrating.com
Elisabeth Adebäck, analyst, +46700442775, elisabeth.adeback@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Rating Methodology published on 8 May 2023, NCR's Rating Principles published on 14 Feb. 2024 and NCR's Group and Government Support Rating Methodology published on 14 Feb. 2024. For the full regulatory disclaimer please see the rating report.