Nordic Credit Rating said today that it had affirmed its 'BB' long-term issuer rating on Sweden-based property manager NP3 Fastigheter AB (publ). The outlook is negative. At the same time, the 'N4' short-term issuer was also affirmed.
The affirmation of the rating reflects continued performance in line with our estimates. We expect the company's net interest coverage to weaken on a temporary basis but improve over our forecast period through 2025.
The 'BB' long-term issuer rating on NP3 Fastigheter reflects the company's highly leveraged balance sheet, modest size and its focus on properties outside city centre locations. The rating is constrained by below-average liquidity in NP3's main markets and a financial risk appetite that, in our view, is greater than warranted by the company's financial ratios. Specifically, we view NP3's rapid growth and single-year debt maturity concentrations as credit weaknesses.
These weaknesses are offset by a highly cash flow-generative property portfolio, the company's strong position in its main markets, long lease terms and its highly diverse revenue streams, with the 10 largest tenants accounting for only 11% of rental income.
The negative outlook reflects our expectation that NP3's net interest coverage is likely to come under pressure in 2023–2024 due to rising interest rates. Our base case projects that this metric will temporarily fall below the level of 2.2x that we define as a potential negative rating driver, but that it will improve over our forecast period through 2025. We see downside risk to this metric, reducing covenant headroom, as well as increased uncertainty arising from an impending slowdown in the Swedish economy. We expect NP3 to maintain its focus on highly cash flow-generative commercial properties in northern and central Sweden, supporting cashflow metrics and the potential for organic deleveraging over time. We expect the company to continue targeting growth, but believe that it will be less focused on acquisitions until the real-estate and capital markets stabilise.
We could lower the rating to reflect the risk of a covenant breach or weakening liquidity. We could also lower the rating to reflect weaker credit metrics, with net interest coverage below 2.2x over a protracted period, or if deteriorating market fundamentals negatively affect occupancy and profitability.
We could revise the outlook to stable to reflect stable credit metrics, with net interest coverage stabilising above 2.2x over a protracted period. We could also revise the outlook to stable to reflect improved portfolio quality, combined with a reduced risk appetite as the portfolio grows.
(i) The Swedish real estate sector– waiting for sunshine after the rain, 27 Sep. 2023.
(ii) Decoding Swedish real estate in an uncertain market environment, 29 Aug. 2023.
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Yun Zhou, analyst, +46732324378, email@example.com
Gustav Nilsson, analyst, +46735420446, firstname.lastname@example.org
Elisabeth Adebäck, analyst, +46700442775, email@example.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 24 May 2022 and NCR's Group and Government Support Rating Methodology published on 18 Feb. 2022. For the full regulatory disclaimer please see the rating report.