Nordic Credit Rating (NCR) today assigned a 'BBB-' long-term issuer credit rating to Swedish commercial property manager LSTH Svenska Handelsfastigheter AB (publ) (Svenska Handelsfastigheter). The outlook is stable.
"The rating reflects the company's diverse property portfolio, long remaining average lease term of more than five years, high occupancy levels, and prudent debt maturity profile," said NCR credit analyst Mille O. Fjeldstad.
Rating Rationale
The rating is supported by Svenska Handelsfastigheter's high numbers of low-cyclicality retail tenants, which have shown resilience to social distancing in response to COVID-19 and abrupt shifts in economic expectations. A recent balance sheet restructuring, replacing a SEK 2.7bn bond with B-shares, has significantly improved the company's credit metrics; loan to value (LTV) is now estimated at 55% for 2020, compared with 80.5% as of end-2019. NCR now expects the interest coverage ratio to improve significantly.
The rating is constrained by Svenska Handelsfastigheter's geographic concentration in Sweden, the challenging outlook for retailers and retail property valuations, and the company's credit metrics, despite the improvement due to the restructuring. Svenska Handelsfastigheter's portfolio contains a high proportion of tailor-made properties. This creates a possibility that alternative tenants might be difficult to find on contract maturity, but at the same time encourages tenant loyalty.
Stable outlook
The stable outlook reflects Svenska Handelsfastigheter's predictable cash flows, which are mostly generated by long-dated contracts linked to the Swedish consumer price index. It also reflects NCR's expectations that Svenska Handelsfastigheter's annual growth rate will continue at current levels, and that future growth will be financed in line with the company's financial policy of maintaining LTV between 50% and 60%. NCR expects most of the company's tenants to show continued resilience to ongoing economic challenges.
Potential positive rating drivers
- Reduced concentration on single shopping areas and retailers as the portfolio grows.
- Increased focus on non-cyclical tenants
Potential negative rating drivers
- Reduced share of non-cyclical tenants
- Change in ownership structure.
- Deterioration of credit metrics with LTV rising above 60% and interest coverage falling below 3x.
If you have any questions, please contact:
Mille O. Fjeldstad, credit rating analyst, +4799038916, mille.fjeldstad@nordiccreditrating.com
Sean Cotten, chief rating officer, +46735600337, sean.cotten@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.