Nordic Credit Rating (NCR) said today that it had lowered its long-term issuer rating on Sweden-based Studentbostäder i Norden AB (publ) (Studentbostäder) to 'B+' from 'BB-'. The outlook is negative. At the same time the short-term rating was lowered to 'N5' from 'N4'.
Rating rationale
The rating action on the long-term rating reflects our view that Studentbostäder's financial risk profile will deteriorate by more than we previously expected. The company is highly exposed to rising interest rates which impact interest coverage and are likely to reduce property values as property yields rise. In our base-case projection, we expect the company to breach a 1.5x interest-coverage maintenance covenant in late 2023 on an outstanding bond. We believe that loan-to-value (LTV) and equity ratio covenants could also come under pressure over the next 12-18 months. In our base-case forecast, we assume property value declines of about 20% over the next few years, resulting in an increase in Studentbostäder's net LTV beyond current policy levels. However, we remain uncertain about the extent and pace that reported property values will be affected by rising interest rates. The company could need to strengthen its balance sheet, most likely through property divestments or equity injections, or a combination of both.
We see liquidity risk as elevated and view a SEK 600m bond maturing in 2024 as a concern as the maturity date approaches. We note that the bond has a call option with a first call date of 13 May 2023. We plan to follow closely the company's plans to refinance the instrument.
Negative outlook
The negative outlook reflects an increased likelihood that Studentbostäder could breach a 1.5x interest-coverage maintenance covenant on the SEK 600m bond. We project that without mitigating action the company will breach the covenant in late 2023. In our view, the company is committed to reducing the likely negative impact on its credit metrics through cost reductions and loan refinancing, as well as possible equity injections and property divestments. We are currently uncertain about the company's profitability and ability to divest and deleverage as well as the future course of market interest rates.
A covenant breach could negatively affect the company's ability to refinance its maturing debt, while increased liquidity risk could result in a multi-notch downward rating revision. In addition, we project a decline in property values over the next few years, which could put pressure on LTV and equity ratio covenants. However, the timing and magnitude are uncertain due to a lack of transactions.
We could lower the rating to reflect deteriorating liquidity or increased refinancing risk. We could also lower the rating to reflect an actual covenant breach, or a distressed exchange request to modify existing bond terms. We could revise the outlook to stable to reflect increased covenant headroom. We could also revise the outlook to stable to reflect significant deleveraging due to, for example, equity injections or asset divestments, or to reflect reduced liquidity risk and refinancing risk.
Rating list | To | From |
---|---|---|
Long-term issuer credit rating: | B+ | BB- |
Outlook: | Negative | Negative |
Short-term issuer credit rating: | N5 | N4 |
Contacts:
Yun Zhou, analyst, +46732324378, yun.zhou@nordiccreditrating.com
Ylva Forsberg, analyst, +46768806742, ylva.forsberg@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 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.