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Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating of holding company Ilija Batljan Invest AB (IB Invest) at BBB-/Stable. Scope has also affirmed the BBB- senior unsecured debt rating and BB rating on the company’s subordinated (hybrid) debt rating.

Rating rationale

The rating action reflects IB Invest’s stable operations, with the business risk profile still assessed at BB+ and the stronger financial risk profile at BBB-. The financial risk profile benefits from the substantial total cost coverage of around 1.5x-2x and a Scope-adjusted loan/value ratio of below 35%.

IB Invest’s business risk profile benefits from its ‘buy and hold’ investment approach, which focuses on: i) cash flows from recurring income from its largest core holding, SBB i Norden, and direct/indirect real estate investments; and ii) capital appreciation on (currently) non-dividend-paying core holdings, held with the clear vision that these growth companies will eventually pay dividends. The exposure to SBB i Norden, which Scope has assessed as a blend of community service properties and residential real estate, dominates IB Invest’s blended industry risk exposure of BBB+. Other financially relevant core holdings are predominantly in commercial real estate. Most of IB Invest’s financially relevant holdings (83% of gross asset value and 81% of total income) are listed companies in developed markets. As such, they can be readily liquidated to provide cash inflow if needed. The remainder either are direct or indirect real estate holdings with decent liquidity or are unlisted shares in growth companies. Liquidity (fungability) of IB Invest's investment portfolio is therefore a key strength in IB Invest’s business risk profile.

IB Invest’s business risk profile is held back by its limited diversification. Three core holdings represent 77% of gross asset value and 82% of income, and the listed liquidity portfolio represents 7% and 10%, respectively. In terms of geographical diversification, the company has a moderate spread across Nordic countries, though associated risks are mitigated by their stable and mature economies with strong welfare and social systems that soften the economic impact in times of distress, which continues to be evidenced by the limited rental losses during the Covid-19 crisis. Industry concentration is also high (residential, community service and commercial real estate), also within SBB i Norden, which contributes 64% of gross asset value and 68% of income as of FY 2021. This concentration is mitigated by the underlying exposure to low-cyclicality residential and social infrastructure segments, whose leases have a weighted average unexpired term of nine years, well above the Nordic average.

IB Invest’s financial risk profile benefits from strong total cost coverage, which stood at 1.5x in 2021. Scope expects total cost coverage to improve to around 1.8x over the next 12 months, given the visibility on significantly increased dividends from SBB i Norden. Total cost coverage is driven by the strong recurring cash flows from core holdings (through dividends, rental income and interest) in relation to the low operating costs, zero dividend pay-outs and lower interest paid through last year’s bond refinancing at favourable terms. However, the issuance of the subordinated hybrid instrument (50% equity content, translating into 50% of hybrid interest being included) has partially offset this benefit. The company’s improved Scope-adjusted loan/value ratio (LTV), at 22% at year-end 2021, down from 32% the year before, is burdened by the share price volatility of its holdings. Scope notes that SBB i Norden’s share price has dropped in 2022, though in line with other Swedish peers in 2022, which took LTV as of end-April above 30% (all else equal). However, Scope believes that LTV will not get higher on a sustained basis judging by IB Invest’s financial policy which aims at keeping the ratio within 15%-30% (based on the company’s own calculations, slightly below Scope-adjusted LTV).

Scope positively notes the company’s focus on sustainability and investments in portfolio companies targeting climate change mitigation and adaptation (ESG factor). IB Invest has specific business lines (called ‘sustainable’ and ‘digital’) that focus on these areas. Similarly, SBB i Norden is aiming for 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 ESG opinion from Cicero.

Scope assesses IB Invest’s liquidity as adequate based on: i) the Scope-adjusted free operating cash flow of around zero; ii) the undrawn portion of loan facilities worth SEK 500m; iii) unrestricted cash of SEK 4m; iv) a highly liquid portfolio of Nordic real estate shares worth SEK 585m (as of FY 2021); and v) no meaningful short term debt (bank debt of SEK 16m).

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Outlook is Stable and incorporates IB Invest’s continuation of main long-term holding in SBB i Norden in addition to its direct and indirect investments in real estate in the Nordics and growth companies specialised in sustainability and digital areas. The Outlook further incorporates Scope’s expectation of no further debt-financed increases in shareholdings, thus keeping Scope-adjusted LTV at around 30%, while total cost coverage remains within a range of 1.5x-2x.

A negative rating action is possible if IB Invest’s total cost coverage deteriorated below 1.5x on a sustained basis or if LTV increased above 35%. This could be the result of an inability of SBB i Norden to pay dividends and/or IB Invest engaging in debt-funded increases in shareholdings.

A positive rating action is unlikely but may be warranted if the company diversified 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 year-end 2021, IB Invest has SEK 110m in unsecured bank debt (ranking structurally ahead of the bond) in addition to SEK 1.2bn in outstanding unsecured bonds. The high amount of unencumbered assets (SEK 7.9bn as of year-end 2021) would benefit a hypothetical expected recovery for senior unsecured debt holders. Scope has therefore affirmed senior unsecured debt at BBB- in line with the affirmed issuer rating.

Scope has affirmed the BB rating on the subordinated perpetual floating-rate callable capital debt (issued note: SE0016101638), two notches below the issuer rating. This is due to the notes’ contractually deeply subordinated and hybrid characteristics.

Disclosure

Scope uses the following key credit metrics to gauge the financial risk profile of an investment holding company: total cost coverage; leverage (LTV); and liquidity. Scope uses total cost coverage as the key indicator. The rating agency defines the total cost coverage ratio as cash inflows versus non-discretionary cash outflows at the holding company level. The ratio signals the extent to which an investment holding company can cover all its discretionary payments. An investment holding company’s leverage – measured as the LTV ratio – only serves as a supplementary credit ratio, indicating its headroom for additional external funding, should this be required to cover upcoming debt maturities. However, as the LTV of an investment holding company tends to be volatile due to constant changes in the portfolio’s market value, Scope only focusses on this ratio in the event of major debt repayments over the foreseeable future. Scope assesses the liquidity of an investment holding company in a similar way to its assessment of liquidity for any other non-financial corporate.

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, 6 July 2021), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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, 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 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 issuer and senior unsecured debt Credit Ratings/Outlook were first released by Scope Ratings on 28 May 2021.
The subordinated debt (hybrid) Credit Rating was first released by Scope Ratings on 1 June 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
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