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Rating action

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

Rating rationale

The downgrade is driven by a lowered assessment of IB Invest’s financial risk profile as total cost coverage and the loan-to-value (LTV) ratio, two key credit metrics, have deteriorated beyond Scope’s expectations and are unlikely to recover in the short-to-medium term given the current market and interest rate environment. Total cost coverage is expected to drop to 1.2x in 2023 from 1.5x at year-end 2022, well below Scope’s previous base case of 1.5-2x over time, while LTV has increased to 50% driven by a slump in the share price of its core holding SBB i Norden. 

IB Invest’s business risk profile (still assessed at BB+) benefits from its ‘buy and hold’ investment approach, which focuses on: i) cash flow 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+, though its share by gross asset value has fallen significantly to 35% from 68%. Most of IB Invest’s financially relevant holdings (60% 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. Liquidity remains a key strength in IB Invest’s business risk profile. IB Invest’s other holdings are direct or indirect real estate holdings with decent liquidity or are unlisted shares in growth companies. This last segment has grown substantially through the investment in wind power company Emergy.

IB Invest’s business risk profile is somewhat held back by its limited if improving diversification. Five core holdings represent 69% of gross asset value and 81% of income (up from three in 2022), and the liquidity portfolio of listed real estate shares represents 10% 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. Industry concentration is also high (residential, community service and commercial real estate) as it represents 68% of gross asset value and 98% of income as of FY 2022. 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 ten years, well above the Nordic average.

IB Invest’s financial risk profile (downgraded to BB+) has been deteriorating, especially in the last six months. Total income has increased by 37% from FY 2021 to FY 2022 and with visibility on dividend payments spoken for 2023, Scope expects a further increase by 6% in FY 2023. Nevertheless, IB invest’s cash interest cost has drastically increased as all debt is floating rate and market values of its core holdings, especially that of SBB i Norden, have shrunk significantly. The latter is a function of interest rates and market sentiment, which have driven Swedish and European real estate shares alike from trading over net asset value to significantly below net asset value.

Mandatory interest costs have increased to SEK 68m in 2022P and are expected to increase to SEK 94m in 2023, while subordinated hybrid interest expenses (50% equity content, translating into 50% of hybrid interest being included) have increased to SEK 55m in 2022 and are expected at SEK 74m in 2023. This lowers total cost coverage (including 50% hybrid interest) to 1.2x in 2023, down from 1.5x in 2022. The company is contemplating fixing the interest rate in the near future to assure more stability, something that might benefit total cost coverage in a future assessment.

IB Invest’s asset market value has shrunk to SEK 4bn as of FY 2022, down from SEK 7.9bn in 2021. During the same period, IB Invest’s Scope-adjusted debt has increased to SEK 2bn from SEK 1.75bn, driving the LTV up to 50% from 22%. While Scope did expect an increase in LTV given market circumstances, it did not expect further debt-funded acquisitions and viewed potential spikes in LTV as temporary, a view that has changed.

Scope positively notes the company’s focus on sustainability and investments in solutions targeting climate change mitigation and adaptation (ESG factor). IB Invest has two business lines dedicated to these areas, called sustainable and digital. 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.

IB Invest’s liquidity is adequate based on: i) Scope-adjusted free operating cash flow of around zero; ii) the undrawn portion of loan facilities worth SEK 500m; iii) unrestricted cash of SEK 64m; iv) a highly liquid portfolio of Nordic real estate shares worth SEK 400m (as of FY 2022); and v) no meaningful short-term debt (bank debt of SEK 3m).

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 50%, while total cost coverage remains at around 1.0x-1.5x. 

A negative rating action would be possible if IB Invest’s total cost coverage dropped to below 1.0x on a sustained basis or if LTV increased above 50%. This could be the result of SBB i Norden’s inability to pay dividends and/or IB Invest engaging in debt-funded increases in shareholdings or further market deterioration applying pressure on the valuation of its core holdings.

A positive rating action 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. An increase of total cost coverage above 1.5x and a lowered LTV around 35% could also lead to a positive rating action.

Long-term debt ratings

As of end-2022, IB Invest has SEK 241m in unsecured bank debt (ranking structurally ahead ft he bond) in addition to SEK 1.4bn in outstanding unsecured bonds. Senior unsecured debt benefits from unencumbered assets worth SEK 4bn as of end-2022 that provide a large pool of collateral to debtholders. Given an above-average recovery under a hypothetical default scenario in 2024, Scope has applied a one-notch uplift to senior unsecured debt and thereby affirmed it at BBB-.

Scope has downgraded the subordinated perpetual floating-rate callable capital notes to BB- from BB, 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 Outlook, (General Corporate Rating Methodology, 15 July 2022), 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 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
This Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and 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 Ratings/Outlook were last released by Scope Ratings on 4 May 2022.
The subordinated debt (hybrid) Credit Rating was first released by Scope Ratings on 1 June 2021. The Rating/Outlook was last released by Scope Ratings on 4 May 2022.

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

Conditions of use/exclusion of liability
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