Nordic Credit Rating (NCR) said today that it had affirmed its 'A-' long-term issuer rating on Sweden-based Heba Fastighets AB (publ) (Heba). The outlook has been revised to negative from stable to reflect our projections for increased financial leverage and weakening net interest coverage. At the same time NCR affirmed the 'N-1+' short-term rating and the 'A-' senior unsecured issue rating.
Weakening financial metrics due to higher pace of investment
Our 'A-' long-term issuer rating on Heba reflects the company's long and stable history of managing residential rental properties in Stockholm, Sweden's highest-demand housing market. Due in part to Heba's stable ownership, the company has maintained a strong financial position, low risk appetite and relatively moderate leverage as it has grown its property portfolio.
The rating is constrained by the company's increased efforts to expand, with a series of acquisitions and new developments in regions on the outskirts of its historical markets and its targeting of a growing share of rental income from elderly care properties, special-needs housing (Swe: LSS-boende) and preschools. The rating is also constrained by increasing investments in projects to build and sell tenant-owned apartments via joint ventures. We expect most of these investments to be financed by debt and lead to higher leverage and loan-to-value (LTV) levels, and the resulting higher financial risk of the company affects our outlook.
Negative outlook
The negative outlook reflects NCR's projections that Heba will increase leverage due to its expansion plans and project investments. In particular, we expect the company to finance a large portion of this growth with debt, given modest cash flow generation, resulting in an increase in net LTV and limiting further improvements in interest coverage. We could lower our rating if the company is unable to maintain its historically very strong financial profile as it expands its investments in tenant-owned apartment developments, increasing the company's business risk. We could revise the outlook to stable if there is less need for debt-financing, resulting in projected net LTV of around 40%, net interest coverage above 5x and commitment to a low risk appetite, or to reflect improvements in diversification and market position and stronger credit metric projections. We could lower the rating if net LTV increases to above 45% for a sustained period, to reflect decreasing net interest coverage due to higher leverage, or to reflect an increased share of development projects in which Heba bears the associated risk.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | A- | A- |
| Outlook: | Negative | Stable |
| Short-term issuer credit rating: | N-1+ | N-1+ |
| Senior unsecured issue rating: | A- | A- |
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.