Nordic Credit Rating (NCR) has affirmed its 'BBB-' long-term issuer rating on Norway-based residential property developer OBOS BBL. The outlook is stable. The 'N3' short-term issuer rating and the 'BBB-' issue rating on the company's senior unsecured debt were also affirmed.
Rating rationale
The affirmation reflects our projection of an improved interest coverage ratio of 2.1−3.4x through 2027, driven by an increase in EBITDA. The company reported a significantly lower EBITDA in 2024 than our previous projections due to a weak housing market and slower-than-expected recovery in the residential property development sector. This led to the EBITDA-to-net-interest ratio weakening to 1.6x at end-2024. While we have observed positive momentum in residential property sales this year, we remain cautious given postponed interest cuts and high building costs. We expect the company's EBITDA to improve over the coming quarters, and see recent joint venture agreements with Thon Gruppen as positive for the company's EBITDA and cash flows. Alongside dividend contributions from OBOS-banken and increased cash flow from OBOS Eiendom, we believe OBOS is equipped to weather the ongoing downturn in residential property development. In our view, the divestment of a 50% share in the projects at Fornebu to Thon Gruppen underscores the value of the company's land bank and demonstrates the financial flexibility afforded by the company's strong balance sheet.
The long-term issuer rating reflects the company's continued strong market position as one of the largest residential developers in the Nordic region. OBOS has been a fixture in the Norwegian housing sector for nearly 100 years and has become a major component of the Swedish housing market over the past decade. Our assessment takes into account the benefits of OBOS' diverse range of business, property holdings, investment and financial activities. It also reflects the company's strong balance sheet, in particular the large excess values in its land bank, equity investments and subsidiaries. We take a positive view of OBOS' demonstrated ability to generate liquidity via partial divestments and partnerships, as well as its healthy covenant headroom.
These strengths are partly offset by a weak residential property development market, in which demand for new housing has declined significantly since the sharp rise in interest rates in 2022. Our assessment is also constrained by OBOS' weak leverage and interest coverage metrics. In our view, the company's structure as a member association results in a limited ability to inject equity, if needed, increasing the importance of its ability to divest its equity investments and land bank to generate liquidity.
Stable outlook
The stable outlook reflects our expectations of a financial risk profile that continues to benefit from a strong balance sheet, with divestments and the completion of housing projects supporting near-term liquidity and continued investment. It also reflects our expectations that OBOS will maintain modest capital spending and control debt increases over the next few years. We believe the company is well-positioned to capitalise when the residential property development market recovers.
We could raise the rating to reflect improved credit metrics with EBITDA to net interest above 4x over an extended period, alongside improved stability and growth in cash flows, and the recovery of the residential development market.
We could lower the rating to reflect lack of recovery in the residential development market, deteriorating credit metrics with an equity ratio below 55%, or weakened liquidity. We could also lower the rating to reflect EBITDA to net interest below 1.5x over an extended period.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB- | BBB- |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N3 | N3 |
| Senior unsecured issue rating: | BBB- | BBB- |
Contacts:
Anine Gulbrandsen, analyst, +4797501657, anine.gulbrandsen@nordiccreditrating.com
Sean Cotten, chief rating officer, +46735600337, sean.cotten@nordiccreditrating.com
Geir Kristiansen, analyst, +4790784593, geir.kristiansen@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.