Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time preliminary rating of (P) BBB-_SF to the senior secured bond issued by SBP Kredit AB.

Preliminary ratings rely on information available to Scope up to 12 December 2021. Scope will assign final ratings conditional to the review of the executed version of all transaction documents and legal opinions. Final credit ratings may deviate from preliminary ratings.

Transaction overview

Scope has assigned preliminary ratings to the up to SEK 750m* senior secured bond issued by SBP Kredit, a publicly listed Swedish company. The bond’s proceeds will be used to finance SBP Kredit’s lending and repay its short-term bridge shareholder financing loan. SBP Kredit focuses on small, mostly first-lien short-term bridge loans granted to Swedish real estate companies to develop and manage residential real estate. SBP Kredit’s securities are mainly first-lien mortgage certificates or shares. Svensk Bostadspartner AB is the main shareholder of SBP Kredit and its sister fund, SBP Kredit II AB, as well as the asset manager.

The current pool as of 30 September 2021 consists of 38 loans to 32 developers and sponsors for a total committed notional of SEK 1,345m, including SEK 801m currently drawn. The current weighted average remaining time to maturity is 11.6 months for a 9.46% weighted average margin. The portfolio loan-to-gross-developed value stands at 58.4% while the current portfolio loan-to-value (LTV) stands at 50.3%.

The corporate debt structure includes a SEK 412m junior profit-sharing loan, up to SEK 55m of super senior and senior committed debt, covenanted unsecured debt and shareholder debt, uncapped subordinated debt, and up to SEK 1,236m of pari-passu debt including the SEK 750m* senior secured bond.

Financial covenants are a 75% indebtedness ratio, a 1.5x senior interest coverage ratio, a 70% portfolio LTV, a 50% look-through LTV and a six-month debt interest reserve with a SEK 30m floor to be maintained at all times.

Rating rationale

The rating reflects Scope’s view of SBP Kredit’s successful real estate lending platform in the Swedish real estate development market. The rating benefits from the positive outlook on Sweden’s real estate market, the granular portfolio and developer base with the top loan representing 9.6% of the total committed portfolio, the short-term financing with an eight-month portfolio weighted average life and the conservative leverage with a covenanted look-through LTV of 50%. Finally, 34% of credit enhancement at issuance and significant excess spread of approximately 5.6% provide a buffer against downturns.

The rating is constrained by the exposure to construction risks and second-lien securities, the limited six-month debt servicing liquidity reserve, as well as SBP Kredit’s ability to leverage up with a senior secured bond (up to SEK 750m*), super senior debt (up to SEK 55m), unsecured debt (uncapped) and non-covenanted subordinated capital. The rating is also constrained by the lax replenishable portfolio guidelines and rundown portfolio mechanism.

Key rating drivers

Granular portfolio of short-term real estate financing (positive). The portfolio is composed of around 40 loans with an approximate expected life of eight months. The top loan exposure must not be larger than 20% of the total committed portfolio while the total number of loans must not fall below 10, limiting idiosyncratic risks.

Conservative look-through leverage (positive). The eligible loan portfolio’s day-one LTV upon completion must be below 70% and SBP Kredit’s look-through LTV must be below 50% at all times. The credit enhancement this provides mitigates loss risks in low rating scenarios. The current LTV upon completion of 49.5% results in a look-through LTV for SBP Kredit of around 31%.

Limited speculative developments (positive). Most of the loan financing already has an exit scenario, through either long-term bank financing or pre-commercialisation. Exit solutions may or may not be binding.

Significant credit enhancement (positive). A junior SEK 412m profit-sharing loan provides [40]% of credit enhancement at issuance.

Significant excess cash (positive). Excess interest cash of approximately 5.7% benefits the rated notes in ramp-down scenarios, providing an additional source of recovery.

Portfolio exposed to construction risks and second-lien securities (negative). The secured portfolio is mostly exposed to construction loans sponsored by small sponsors and operators with only few second-lien securities. Above-average default risk and below-average recoveries are possible.

Replenishable portfolio with lax investment guidelines (negative). Principal proceeds from repaid loans are used to invest in new eligible loans. Investment guidelines are lax (i.e. first or second lien), few in number and only tested at the date of a loan’s insertion in the portfolio.

Leveraging option (negative). SBP Kredit is entitled to leverage up with up to SEK 55m of debt that ranks senior to the outstanding rated senior secured bond (super senior debt) and to a 75% indebtedness ratio. This reduces the initial senior credit enhancement to around 29% from [40%].

Corporate and debt structure (negative). The issuer’s non-bankruptcy remoteness exposes it to its shareholder’s credit quality. The existence of subordinated shareholder debt not governed by the intercreditor agreement raises risks of its repayment ahead of the secured debt.

Maturity risk (negative). There is no minimum buffer period between the maturity of the credit loans and the maturity of the senior secured bond, exposing the issuer to maturity mismatch. Additionally, a repayment at maturity embeds a premium, implying a potential loss (i.e. repayment at above par value at maturity).

Sourcing and liquidity risks (negative). SBP Kredit’s total assets do not cover the total committed loan notional, exposing it to liquidity stress if scheduled repayments are delayed or scheduled drawdowns frontloaded. SBP Kredit must therefore resort to its capital to service its high running and debt servicing costs.

Absence of default covenants on loans (negative). There are no default covenants on the underlying loans, limiting the sponsor’s ability to quickly undertake an enforcement process.

Rating-change drivers

Tighter and standardised underwriting standards (upside). The insertion of default covenants, the standardisation of cash trap covenants and/or the exclusion of second-lien securities would benefit the portfolio’s credit profile.

A larger and more diversified portfolio (upside) would reduce the weight of idiosyncratic loan risks.

Releveraging (downside). Drawings under super senior debt, the hedging debt, pari-passu senior debt and/or unsecured debt and the shareholder debt facility would reduce credit enhancement for the rated senior secured bond.

Quantitative analysis and assumptions

The assigned rating factors in non-stabilised and stabilised capitalisation rates of 6.6% and 5.0% respectively, a rental value haircut of 9.3%, a sustainable rental value haircut of 0% and a structural vacancy of 5.0%. For the construction loans, the rating-conditional time to completion including rent-free periods were stressed at 16 months. Scope assumed a B credit quality for property developers and existing tenants. The loan collateral value was estimated to be always equal to its rating-conditional gross developed value net of capex to be invested plus a 30% developer margin.

For developed real estate and future leases, Scope assumed non-recoverable maintenance costs of 0.5% of market value as well as total operating costs and fees of 33% of gross rental income. A three-month leasing fee and void costs of 30% of the estimated rental value were also assumed. Upon a default, Scope considered 9.0% of liquidation costs on the stressed property value and 1.5% of the outstanding debt notional capped at EUR 2.0m for legal costs. Scope considered a rating-dependent foreclosure period of 13 months.

Scope considered the underlying loan covenants to be weak and therefore excluded them from the analysis. Scope simulated a default upon an LTV of more than 100% as well as a failure to refinance upon loan maturity followed by a collateral liquidation at its point-in-time expected value.

Sensitivity analysis

Scope tested the resilience of the rating based on the cash flow performance at the expected closing date. The transaction’s sensitivity was tested against a 20% increase in the main base case assumptions, namely, the capitalisation rate, rental value haircut and structural vacancies. The sensitivity against the default of the two largest tenants and a lower weighted average loan coupon were also tested.

The results show no impact from increases in the rental value haircut, capitalisation rate, voids, development delays and vacancies.

This analysis has the sole purpose of illustrating the sensitivity of the rating to input assumptions and is not indicative of expected or likely scenarios.

*This was amended on 11 January 2022. In the original publication the amount was SEK700m.

Rating driver references
1. Loan-by-loan datatape of the securitised pool (confidential)
2. Transaction documents (confidential)
3. Scope takes no rating action on Sweden

Stress testing
Stress testing was performed by applying Credit-Rating-adjusted recovery rate assumptions.

Cash flow analysis
Scope Ratings derives the rated instrument’s expected loss, and the expected weighted average life of the cash flows the instrument generates. These are then compared to the idealised expected loss table to establish the quantitative rating outcomes. Expected losses reflect the present value of projected interest and principal payments, discounted at the instrument’s rate promised to the investor, divided by the rated instrument’s initial value.

Methodology
The methodologies used for this Credit Rating, (CRE loan and CMBS rating methodology, 25 August 2021; General Structured Finance Rating Methodology, 17 December 2021**; Methodology for Counterparty Risk in Structured Finance, 13 July 2021) are 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.

**This was amended on 11 January 2022. In the original publication the date was 14 December 2020.

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 Rating: public domain, the Rated Entity, 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 the Credit Rating 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.
Scope Ratings has performed its own analysis of the data quality, based on information received from the Rated Entity or Related Third Parties, which is not and should be not deemed equivalent to the performance of due diligence or an audit.The internal analysis was considered when preparing the Credit Rating and it has no impact on the Credit Rating.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
The Credit Rating is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Rating is UK-endorsed.
Lead analyst: Florent Albert, Director
Person responsible for approval of the Credit Rating: Antonio Casado
The preliminary Credit Rating was first released by Scope Ratings on 10 January 2022.

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
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