Nordic Credit Rating said today that it had revised its outlook on Sweden-based property manager NP3 Fastigheter AB (publ) to negative from stable. At the same time, the 'BB' long-term and 'N4' short-term issuer ratings were affirmed.
Rating rationale
The outlook revision reflects our expectations that NP3's net loan-to-value (LTV) and net interest coverage metrics will weaken as a result of rising interest rates and declining property values. Consequently, we have revised our expectations for net interest coverage in 2023 to 2.2x from 3.1x a year earlier, and our projections for net LTV in 2023 to 64% from 63% a year earlier. Positively, we expect the company's net debt/EBITDA to improve slightly due to a large proportion inflation-linked rental contracts.
We expect NP3's property values to be less impacted by rising property yields than those of most of its peer group mainly because property yields in the company's areas of operation and property types were comparatively high to begin with. However, we believe that NP3's high financial leverage and low degree of interest fixing leaves it more sensitive to changes in property values and interest rates than most of its peers. In addition, we believe that NP3's concentrated debt maturity profile, with significant bond maturities in the next few years, increases refinancing risk. However, near-term risk is low, as only relatively minor maturities occur within the next 12 months.
In our view, the risk of recession in Sweden has increased, which could have an adverse impact on NP3's tenants. Positively, the company's diverse tenant mix means that it is unlikely to be negatively affected by difficulties for single tenants, while substantial planned infrastructure investments in northern Sweden are likely to support operating conditions in NP3's areas of operation.
Negative outlook
In addition to the factors mentioned above, the negative outlook reflects our view that NP3's credit risk profile and credit metrics are vulnerable and face additional downside risk. We also see increased uncertainty arising from an impending slow-down in the Swedish economy. We expect the company to maintain its focus on highly cash-flow generative commercial properties in northern Sweden and the Karlstad–Västerås region, supporting cash-flow metrics and enabling 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 revise the outlook to stable to reflect stable credit metrics, with net LTV below 65% and net interest coverage 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. We could lower the rating to reflect weaker credit metrics such as net LTV above 65% or net interest coverage below 2.2x over a protracted period. We could also lower the rating if deteriorating market fundamentals negatively affect occupancy and profitability.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BB | BB |
| Outlook: | Negative | Stable |
| Short-term issuer credit rating: | N4 | N4 |
Contacts:
Marcus Gustavsson, analyst, +46700442775, marcus.gustavsson@nordiccreditrating.com
Ylva Forsberg, analyst, +46768806742, ylva.forsberg@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Rating Methodology published on 18 Feb. 2022, 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.