Nordic Credit Rating (NCR) said today that it had revised its outlook on Sweden-based property manager Stenhus Fastigheter to stable from negative. At the same time, the 'BB' long-term and 'N4' short-term issuer ratings were affirmed. We also affirmed the 'BB-' senior unsecured issue rating.
Rating rationale
The outlook revision reflects our expectation that Stenhus Fastigheter's leverage will remain modest and its interest coverage ratio will improve slightly over our forecast period through 2026. We believe that the company's down-side risks to its financial metrics have decreased due to reduced uncertainty about market interest rates and lower leverage. We project that net interest coverage will reach its low point at 1.8x in 2024 before improving towards 2.2x by 2026, providing additional covenant headroom. We expect that the company will remain cautious regarding capital expenditures and maintain a small development project portfolio.
Our long-term issuer rating on Stenhus Fastigheter reflects the company's brief operating history, high growth rates and limited covenant headroom. The rating also incorporates the company's high-yielding property portfolio, often in non-central locations, and our expectation that interest coverage will improve slightly while remaining somewhat weak over our forecast period.
The weaknesses are partly offset by Stenhus Fastigheter's long lease terms, strong profitability and high occupancy. The company's primary geographic focus, the Mälardalen region including Stockholm, has strong economic fundamentals, which we view as a credit strength. We take a positive view of Stenhus Fastigheter's 21% exposure to public-sector tenants, which provides stability, while the high-yielding assets in the portfolio generate relatively strong cash flow. Furthermore, Stenhus Fastigheter's recent portfolio growth has increased revenue diversity, which we regard positively.
Stable outlook
The stable outlook reflects our expectation that Stenhus Fastigheter's net interest coverage will improve over our forecast period through 2026. The outlook also factors in our view that the company will remain cautious regarding capital expenditures and continue its deleveraging plans. We also expect the company will maintain adequate liquidity, take a proactive stance in refinancing and continue to focus on its currently targeted property subsectors and regions.
We could raise the rating to reflect a more conservative financial strategy, extended debt maturity and interest profile, and a net loan-to-value (LTV) ratio below 50% and net interest coverage above 3.5x over a prolonged period. We could lower the rating to reflect diminishing covenant headroom, a deterioration in credit metrics, with net LTV approaching 60% over a protracted period, or worsening market fundamentals adversely affecting profitability.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BB | BB |
| Outlook: | Stable | Negative |
| Short-term issuer credit rating: | N4 | N4 |
| Senior unsecured issue rating: | BB- | BB- |
Contacts:
Yun Zhou, analyst, +46732324378, yun.zhou@nordiccreditrating.com
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com
Sean Cotten, chief rating officer, +46735600337, sean.cotten@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.