Scope downgrades Ilija Batljan Invest AB’s debt ratings, places ratings under review for downgrade*
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Scope Ratings GmbH (Scope) has today downgraded the senior unsecured debt rating to BB+ from BBB- and the subordinated hybrid note rating to B+ from BB-. Scope has placed all ratings, including the BB+ issuer rating, under review for a possible downgrade.a
The under-review status reflects heightened uncertainty for IB invest following the announcement on 29 May 2023 by its core holding Samhällsbyggnadsbolaget i Norden AB (SBB) to perform a strategic review that could result in SBB’s partial or full sale1. This has increased uncertainty about the future composition of SBB's assets and liabilities, directly impacting IB Invest’s credit metrics through a highly volatile loan/value ratio and greater uncertainty about the size and likelihood of future dividends from SBB, which is a significant part of IB Invest’s income. As a consequence of a deterioration in the expected recovery of the long-term debt, Scope has downgraded senior unsecured debt to BB+ from BBB- and contractually deeply subordinated notes with hybrid characteristics to B+ from BB-.
Scope’s rating base case has not changed since its last rating action on 15 May 2023 as dividends from SBB were already assumed postponed. IB Invest’s decision to defer coupon payments on its subordinated hybrid notes (as contractually allowed) will benefit Scope’s calculation of total cost coverage, but only until the coupons resume. The same timing issue applies on the income side in terms of the postponed dividends to be received from SBB. Given the indirect link between the postponed dividends from SBB and the deferred coupon payments from IB Invest, IB Invest’s loan/value ratio has suffered, offsetting the positive impact on total cost coverage.
Under review for possible downgrade
Scope will closely monitor updates relating to SBB’s partial or complete sale as well as other measures to be decided under SBB’s strategic review. The agency will also monitor the issuers refinancing strategy in regard to its senior unsecured bond that matures in December 2024. Scope will resolve the under-review status once there is clarity on measures to be taken by SBB along with their impact on SBB’s share value and ability to pay dividends to IB Invest.
A positive rating action is seen as remote but could be warranted if the situation at SBB stabilised while IB Invest improved the diversification of its income-generating holdings. This could be the result of adding more mature investments through 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 lower loan/value of around 35% could also lead to further upside on the rating.
A confirmation would require on a sustained basis a total cost coverage of 1.0x or above or a loan/value ratio of 50% or below, while uncertainties at SBB are removed.
A downgrade could occur if IB Invest’s total cost coverage dropped to below 1.0x on a sustained basis or the loan/value increased to above 50%. This could be the result of SBB’s inability in the future to pay the currently postponed dividends or a permanent change in its dividend policy and/or SBB’s share asset values failing to stabilise or even worsening as a consequence of actions taken following the strategic review. Further triggers for a downgrade include IB Invest engaging in debt-funded increases in shareholdings or market deterioration that applies pressure on the values of its core holdings.
A downgrade could also be triggered by a lack of a sound refinancing plan in regard to the senior unsecured bonds that mature in December 2024. Refinancing should be addressed in a timely manner to avoid a non-structured liquidation of assets to meet these debt maturities.
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. Those rank ahead of the SEK 750m in subordinated perpetual floating-rate callable capital notes.
Scope has re-performed the hypothetical default scenario for 2024 to account for the deterioration in SBB’s share price over the last few weeks and the uncertainty attached to its strategic review. Scope highlights a high sensitivity to changes in underlying assumptions, resulting in the possibility of the recovery assessment reducing to ‘average’ from the current ‘above-average’. This would translate in the removal of the one-notch uplift on senior unsecured debt and an equalisation (and downgrade) of the debt class to the level of the issuer rating of BB+.
The same applies to the recovery assessment of the subordinated perpetual floating-rate callable capital notes, whose negligible recovery has led to a rating that is three notches below the issuer rating. The accumulated interest on the coupon deferral is also detrimental to the recovery assessment. As such Scope has downgraded the contractually deeply subordinated notes with hybrid characteristics to B+ from BB-.
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.
*. The sentence has been amended on 9 June 2023. In the original publication the text read: Scope places Ilija Batljan Invest AB’s ratings under review for possible downgrade
a. The sentence has been amended on 9 June 2023. In the original publication the text read: Scope Ratings GmbH (Scope) has today affirmed the BB+ issuer rating of Ilija Batljan Invest AB (IB Invest) and downgraded the senior unsecured debt rating to BB+ from BBB- and the subordinated hybrid note rating to B+ from BB-. All ratings have been placed under review for a possible downgrade.
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.
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.
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 15 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 15 May 2023.
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