Nordic Credit Rating (NCR) said today that it had revised its outlook on Sweden-based property manager Stenhus Fastigheter i Norden 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 expectation that Stenhus Fastigheter's net interest coverage ratio will weaken towards covenant levels. Our base-case projections anticipate that net interest coverage will decrease to 2.1–2.2x in 2023–2024, compared with our previous estimates of above 3.0–3.2x. We expect this metric to remain commensurate with covenants, which in most cases stipulate that it should exceed 2.0x, but believe headroom will be limited. In our view, there is further downside risk to the metric, due to uncertainty about market interest rates. Consequently, we believe that covenant headroom could diminish faster than we currently expect, despite the mitigating effect of the completion of development projects and inflation-linked rental contracts.
Stenhus Fastigheter's sensitivity to rising interest rates stems from its low degree of fixed interest, leaving the company more sensitive than most of its peers. Furthermore, we believe the company's large debt maturities in the coming two years increase liquidity and refinancing risk. However, we expect Stenhus Fastigheter's property values to be less impacted by rising property yields than those of most of its peer group, mainly because yields in the company's property types were comparatively high to begin with.
Over the last year, Stenhus Fastigheter has acquired Randviken Fastigheter AB (Randviken), roughly doubling its property portfolio. We take a positive view of this improvement in business risk profile, especially since it reduces portfolio concentrations. We expect this increased revenue diversity to mitigate the impact of a forecast slowdown in Sweden's economy, reducing the impact of difficulties for single tenants.
Negative outlook
The outlook is negative, reflecting our expectation that Stenhus Fastigheter's net interest coverage will weaken over our forecast period through 2024. In our base-case projection, we expect net interest coverage to remain commensurate with covenant levels through 2024, but that headroom will become increasingly limited in 2023 and 2024. We believe that downside risk has increased due to uncertainty about market interest rates and that covenant headroom could diminish faster than we currently expect, despite the mitigating effect of the completion of development projects and inflation-linked rental contracts. We expect Stenhus Fastigheter to integrate the operations of recent acquisition Randviken Fastigheter AB successfully. We also expect the company to continue to focus on its currently targeted property subsectors and regions.
We could revise the outlook to stable to reflect increased or stable covenant headroom, with net interest coverage well above 2.0x. We could lower the rating to reflect an impending or actual covenant breach, a deterioration in credit metrics with net loan to value above 60% or net interest coverage below 1.5x over a protracted period, or to reflect deteriorating market fundamentals adversely affecting occupancy and/or profitability.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BB | BB |
| Outlook: | Negative | Stable |
| Short-term issuer credit rating: | N4 | N4 |
Contacts:
Yun Zhou, analyst, +46732324378, yun.zhou@nordiccreditrating.com
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@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.