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Rating action

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

Rating rationale

The change of Outlook reflects heightened uncertainty as IB invest’s core holding SBB i Norden has proposed postponing its dividend payments to May 2024. Scope expects that this will cause the company’s total cost coverage (TCC) to dip to below 1x in 2023, before increasing to surpass 2022 levels, balancing itself over 2023-2024.

On 08 May 2023, a competitor’s rating action on SBB i Norden (IB invest’s largest core holding) applied significant pressure on SBB i Norden and its share price. The board rescinded its previously contemplated equity raise in SBB i Norden and proposed to postpone monthly and quarterly dividends (respectively series A and B shares; D shares) from June 2023 and pay them in arrears as a lump sum in 2024.

SBB i Norden will convene an extraordinary meeting at the beginning of June 2023 to achieve the authorisation from shareholders to accumulate dividends for A, B and D shares in 2023 and pay them in a lump sum ahead of the next ordinary annual meeting in mid-May 2024. This postponement is the most drastic action IB Invest could take as under Swedish law, announced dividends cannot be cancelled, only postponed. SBB i Norden’s intention is to resume normal monthly and quarterly dividends from the next ordinary annual meeting.

Since Scope expects the proposal will be accepted, IB invest’s total recurring income will be reduced in Scope’s calculation to around SEK 100m in 2023, down from SEK 154m in 2022. This paired with the expected increase in interest paid as explained in Scope’s rating action from 05 May 2023 (available here) will lead to a temporary deterioration of IB invest’s total cost coverage to below 1x, at 0.7x. The expected catch-up effect in 2024 with the payment of the postponed dividends in addition to the expected normal resumption of dividends translates into a TCC of 1.7x for 2024. On average across 2023-2024, the TCC is therefore unchanged at around 1.2x, but the temporary gap in TCC will need to be covered by cash on balance sheet and/or the sale of a fraction of IB Invest’s liquidity portfolio.

Outlook and rating-change drivers

The Outlook is Negative and captures the recently proposed postponement of dividends of IB Invest’s dominant core holding SBB i Norden. While Scope appreciates that these dividends will be paid before the next ordinary annual meeting in mid-May 2024 and the sum of expected dividend income thereby remains unchanged, the amended payment schedule constitutes a change in the previously perceived untouchable dividend policy of SBB i Norden and thereby increases uncertainty.

Scope’s base case assumes the company will retain its 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 loan-to-value at around 50%, while TCC remains at 1.0x-1.5x through the cycle.

A downgrade could occur if IB Invest’s total cost coverage dropped to below 1.0x on a sustained basis or if loan-to-value increased to above 50%. This could be the result of SBB i Norden’s inability to pay postponed dividends or a permanent change in dividend policy and/or IB Invest engaging in debt-funded increases in shareholdings or a market deterioration applying pressure on the valuation of its core holdings.

A return to a Stable Outlook would be possible if IB Invest’s total cost coverage remained at or above 1.0x on a sustained basis or if loan-to-value remained at or below 50%. A positive rating action could 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 to above 1.5x and a lowered loan-to-value of around 35% could also lead to further upside.

Long-term rating

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

Scope has affirmed the subordinated perpetual floating-rate callable capital notes at BB-, two notches below the issuer rating. This is due to the notes’ contractually deeply subordinated and hybrid characteristics.

Rating driver references
1. Press release SBB i Norden

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 Outlooks, (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/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks 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 2023.
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 2023.

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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