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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of BBB-/Stable to Ilija Batljan Invest AB. Scope has also assigned a first-time rating of BBB- to the company’s senior unsecured debt.

Rating rationale

IB Invest’s business risk profile (assessed at BB+) benefits from its ‘buy-and-hold’ investment approach, which focusses on: i) cash flows from recurring income from its core holding SBB i Norden and direct/indirect real estate investments; and ii) capital appreciation on the (currently) non-dividend paying remaining core holdings with the clear vision of these growth companies turning into dividend paying companies. IB Invest’s core exposure to SBB i Norden, assessed as a blend of commercial and residential real estate, dominates the blended industry risk exposure of BBB-. Other financially relevant core holdings are predominantly in commercial real estate. The majority of IB Invest’s financially relevant holdings (87%of gross asset value [GAV] and 78% income contribution) are publicly listed companies in well-developed markets. As such they could provide cash inflows through partial liquidation if needed. The remainder are either direct or indirect real estate holdings with decent assessed liquidity or unlisted shares in growth companies. Scope therefore views liquidity as a key strength in IB Invest’s business risk profile.

IB Invest’s business risk profile is somewhat held back by its limited diversification. Only three core holdings represent 78% of GAV and four core holdings represent 86% of income. In addition, the liquidity portfolio of listed shares accounts for 9% of GAV and 13% of income. In terms of geographies, the company has a moderate spread across the Nordics, with Sweden dominating income contribution at 79%. This moderate geographic spread is mitigated by exposure to stable and mature economies with strong welfare and social systems that soften the economic burden in times of distress, as evidenced by contained rental losses during the ongoing pandemic. IB Invest has a highly concentrated portfolio in terms of industries (residential and commercial real estate) and within its main core holding SBB i Norden, which contributes 63% of GAV and 65% of income as of Q1 2021. This top holding concentration is mitigated by the underlying industry exposure to residential and defensive social infrastructure properties, which have low cyclicality. Two-thirds of IB Invest’s largest tenants are government agencies, it has a weighted average unexpired lease term of nine years, which is significantly above the Nordic average, and achieved rental collection of 99.8% during the pandemic.

IB Invest’s financial risk profile (assessed at BBB-) benefits from strong total cost coverage, which stood at 1.4x at year-end 2020. Scope expects cost coverage to improve to around 2x, given the visibility on significantly increased dividends from SBB i Norden and the upcoming intended refinancing. Total cost coverage is driven by strong recurring cash flows from IB Invest’s core holdings through dividends, rental income and interests, in relation to low operating expenses, no dividend pay-outs and intended improved interest expenses. Scope expects interest expenses to ease with the upcoming refinancing, although the potential issuance of a subordinated hybrid instrument (assumed to qualify for 50% equity content) would reduce this benefit somewhat. The latter would help the cost coverage of mandatory expenses, as the hybrid instrument allows for coupon deferral. The company’s Scope-adjusted loan/value ratio (LTV) assessed at 32% at year-end 2020, up from 25% the year before, burdens its financial risk profile. However, LTV could be more volatile depending on liquid asset prices. The elevated LTV is somewhat mitigated by IB Invest’s policy of remaining within an LTV target range of 15%-30% (based on the company’s own calculations, slightly below Scope’s LTV) and its intention of not increasing net debt levels through the upcoming or future refinancing.

Scope positively notes the company’s focus on sustainability and investments in solutions targeting climate change mitigation and adaption. IB Invest’s ‘sustainable’ and ‘digital’ segments focus on these factors. Similarly, its core holding SBB i Norden aims to achieve climate neutrality by 2030 and engages in social issues. IB Invest’s efforts are exemplified by its green bond framework and procurement of a second opinion from Cicero on its ESG efforts.

Scope assesses IB Invest’s liquidity as adequate given: i) around zero Scope-adjusted free operating cash-flow; ii) the undrawn portion of loan facilities worth SEK 447m; iii) unrestricted cash of SEK 90m; iv) a highly liquid portfolio of Nordic real estate shares that could be unwound at short notice, worth SEK 350m (as of April 2021); and v) bond debt of SEK 1bn maturing in September 2022 (to be refinanced early in June 2021).

Outlook and rating-change drivers

The Outlook for IB Invest is Stable and incorporates a continuation of the company’s main long-term holdings in SBB i Norden in addition to its direct and indirect investments in real estate in the Nordics and growth companies in sustainability and digital areas. The Outlook further incorporates Scope’s expectation that the company will not engage in further debt-financed increases in shareholdings, thus keeping leverage as measured by the Scope-adjusted LTV at around 30%, while total cost coverage remains at around 1.5-2x going forward.

A negative rating action would be possible if IB Invest’s total cost coverage deteriorated below 1.5x on a sustained basis or the LTV increased above 35%. This could be the result of its main holding SBB i Norden not being able to pay dividends and/or the company engaging in debt-funded increases in shareholdings.

A positive rating action is unlikely but may be warranted if the company diversifies its income-generating holdings. This could be the result of a more mature investment portfolio through either the organic growth of its sustainable and digital portfolio or an investment reshuffle.

Long-term and short-term debt ratings

As of April 2021, IB Invest had SEK 130m in unsecured bank debt (ranking structurally ahead of the bond) in addition to SEK 1bn in unsecured bonds outstanding. Senior unsecured debt benefits from unencumbered assets currently worth SEK 3.9bn, providing a large pool of collateral to debtholders. Scope therefore rates senior unsecured debt at BBB-, the level of the issuer rating. 

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and/or Outlook, (Corporate rating methodology, 26 February 2020), is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 28 May 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.