Nordic Credit Rating said today that it had affirmed its 'A-' long-term issuer rating on Swedish community service property manager Vacse AB (publ). The outlook is stable. The 'N2' short-term issuer rating and the 'A-' senior unsecured issue rating were also affirmed.
Rating rationale
The long-term issuer rating reflects Vacse's strong financial position, prudent financial risk management, low financial leverage, and strong interest coverage. The company has strong liquidity and a diverse debt maturity profile with no maturities until May 2026. We expect the company to continue to refinance maturing debt proactively. The rating also reflects our view that the company's property values have limited downside risk and will remain relatively flat after write downs of about 5% from the third quarter of 2022. We expect ongoing projects to be finalised on schedule, effectively reducing tenant and property concentrations. Projects are acquired upon completion and entail no ongoing cash outflows.
In addition, the rating reflects Vacse's strong portfolio of modern, tailor-made properties leased on long contracts to highly creditworthy public-sector authorities that are essential to Sweden's public security. It also reflects the company's high operating efficiency and virtually 100% occupancy rate. We take a positive view of the company's low development risk as projects are carried out on fixed-price contracts with payment upon completion. The rating is supported by Vacse's long fixed-interest periods, strong liquidity and balanced debt maturity profile. It is also underpinned by strong owners with a commitment to maintaining a stable financial risk profile.
These strengths are offset by the limited number of Vacse's properties (23) and tenants, with the top 10 tenants generating most of the company's revenues. We believe the concentrations in Vacse's portfolio create some risk at contract expiry, although the risk is low due to negligible lease maturities over the next few years.
Stable outlook
The stable outlook reflects our expectations that Vacse will continue to grow through contracted acquisitions of development projects without deviating from its current low-risk financial risk profile. We expect interest coverage to weaken as the company's interest fixing arrangements expire, but that stable long-term rental contracts with strong counterparties will support cash flows. It also reflects our view that the company's property values have limited downside risk.
We could raise the rating to reflect stronger credit metrics together with significant portfolio growth and diversification that do not compromise the company's low-risk business profile.
We could lower the rating to reflect net loan-to-value above 45% or EBITDA/net interest below 3.5x over a protracted period, any deviation from the company's low-risk business profile, or an adverse change in ownership or the owners' risk appetite.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | A- | A- |
| Outlook: | Stable | Stable |
| Short-term issuer credit rating: | N2 | N2 |
| Senior unsecured issue rating: | A- | A- |
Related publications
(i) Swedish real estate: Likely interest rate cuts allow for cautious optimism, 24 Sep. 2024.
(ii) Swedish real estate snapshot (Q2 2024): Interest rate cuts likely to continue, 5 Sep. 2024.
(iii) Real-estate snapshot (Q1 2024): A step towards long-term normalised interest rate levels, 23 May 2024
(iv) Real-estate quarterly snapshot (Q4 2023): Strong performance despite highest Swedish corporate defaults, 11 Mar. 2024.
(v) Swedish real estate sector adapts to tougher financing climate, 18 Jan. 2024.
Contacts:
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com
Yun Zhou, analyst, +46732324378, yun.zhou@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.