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      WEDNESDAY, 10/04/2024 - Scope Ratings GmbH
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      Scope downgrades SBB’s senior unsecured debt to CCC, maintains under review

      Scope downgrades SBB’s senior unsecured debt to CCC from B- due to reduced recovery expectations.

      The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

      Rating action

      Scope Ratings GmbH (Scope) has today downgraded Samhällsbyggnadsbolaget i Norden AB’s (SBB) senior unsecured debt rating to CCC from B-. Scope has downgraded the subordinated (hybrid) debt rating to C from CC. Both ratings were maintained under review for a developing outcome.

      Scope has taken no action on SBB’s issuer rating (CCC under review for a developing outcome) and its short-term debt rating (S-4 under review for a developing outcome).

      Rating rationale

      The downgrade of the senior unsecured debt rating to CCC from B- follows a lower expected recovery in a context of a hypothetical default scenario. Recovery expectations are impacted by SBB's ongoing balance sheet restructuring, which leads to a high degree of uncertainty about recoverable values, coupled with uncertainty about the future asset base and the fact that assets are held by SBB subsidiaries where they are not directly accessible to creditors. Furthermore, recovery expectations are reduced by SBB's preference for subordinated creditors over senior creditors, as exemplified by the recent buy-back of perpetual hybrid bonds, which have no intrinsic repayment obligation and interest payments that can be deferred.

      Reduced recovery expectations led to the downgrade of the subordinated (hybrid) debt rating to C from CC.

      Scope has taken no action on the issuer and short-term debt ratings, as the agency views the outcome of SBB's recent tender offer as an opportunistic debt exchange. The outcome of the tender offer does not meet Scope's definition of default. While it results in less favourable terms for bondholders, given the significant discounts at which the bonds were tendered, it does not have the effect of avoiding a likely default and thus does not constitute a distressed debt exchange.

      On 24 March 2024 SBB announced the result of a voluntary tender offer for a number of outstanding euro-denominated senior unsecured and hybrid debt instruments up to a maximum purchase amount of EUR 250m. The tender offer was conducted as an unmodified Dutch auction with a minimum purchase price set by SBB for each debt instrument. The acceptance of tendered instruments and the total amount used was at the sole discretion of SBB. The company accepted senior unsecured bonds due in 2027, 2028 and 2029 as well as perpetual hybrid bonds with reset dates in 2025 and 2026 in the amount of EUR 408m for a total cash consideration of EUR 163m.

      SBB does not disclose the accepted purchase price of each instrument but given an average discount of 60% across all instruments, Scope has reason to believe that all instruments were repurchased at a significant loss of value relative to the original debt terms. Scope understands that the hybrid instruments were repurchased at significantly higher discounts than the senior unsecured bonds, demonstrating the loss-absorbing nature of such instruments, which were granted with a 50% equity credit by the agency.

      Scope views the transaction as opportunistic rather than distressed, as the agency does not view it as having been undertaken to avoid a likely default in the short to medium term. The senior unsecured bonds accepted in the tender are long-dated and hybrid debt instruments to not have a repayment obligation. SBB is therefore not retiring short-term debt at a significant discount that might indicate a distressed debt exchange.

      Long-term and short-term debt ratings

      As at 31 March 2024, SBB has outstanding senior unsecured debt of SEK 41bn. Ongoing balance sheet restructurings, including the Castlelake JV and the potential listing of SBB's associate Public Property Invest AS, have increased uncertainty about available assets and their encumbrances. In addition, SBB's preference for subordinated creditors over senior creditors in the recent tender increases the unpredictability of the liability structure in a hypothetical issuer default scenario assumed in 2025. As a result, Scope expects only an average recovery compared to a superior recovery prior to the bond buyback executed on 26 March 2024. Thus, the agency highlights the high sensitivity of recovery expectations to advance rates and the liability structure at the time of a hypothetical default. The lower recovery expectation led to the downgrade of the senior unsecured rating to CCC from B-. The debt rating has been maintained under review for a developing outcome.

      Outstanding subordinated (hybrid) debt amounted to SEK 13.0bn following the recent tender offer. Hybrid debt benefits from coupon deferral at the issuer’s discretion, deep contractual subordination and a long remaining maturity. Scope grants 50% equity credit for these hybrid debt instruments. The recovery expectations for subordinated (hybrid) debt are very low resulting in the downgrade to C from CC. The debt rating has been maintained under review for a developing outcome.

      Scope has left the S-4 short-term debt rating unchanged. The rating is based on SBB’s CCC issuer rating, which is under review for a developing outcome, and reflects SBB's worse than adequate liquidity and limited access to the capital markets. However, SBB still has access to banks and undrawn committed credit lines with maturities of over one year. The rating remains under review for a developing outcome.

      Under review for a developing outcome

      Scope will closely monitor any developments regarding the disposal of properties and the anticipated comprehensive plan addressing upcoming maturities over the next 18 months. Scope will also monitor the use of proceeds and the impact any partial sale would have on portfolio value. Scope will resolve the under-review status once there is sufficient clarity on the implementation of SBB’s strategic review.

      A prerequisite for an upgrade is the implementation of a comprehensive restructuring of assets that leads to a reduction in leverage and a noticeable improvement in SBB's liquidity, e.g. if planned disposal proceeds and/or refinancing can cover maturities over the next 18 months. Furthermore, any plan should not involve a restructuring of liabilities that leads to losses for SBB’s creditors and which would constitute a distressed debt exchange.

      A downgrade could be triggered either by a further deterioration in SBB's liquidity, e.g. the loss of undrawn revolving credit facilities to bridge short-term refinancing needs, or by the failure to roll over secured bank debt. A downgrade could also be triggered if the company were to restructure liabilities in a way that leads to losses for debt holders and that would constitute a distressed debt exchange, though Scope considers this unlikely and has not reflected this scenario in its base case.

      Stress testing & cash flow analysis
      No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

      Methodology
      The methodologies used for these Credit Ratings, (European Real Estate Rating Methodology, 28 March 2024; General Corporate Rating Methodology, 16 October 2023), are 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.

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

      Regulatory disclosures
      These Credit Ratings are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings are UK-endorsed.
      Lead analyst: Thomas Faeh, Executive Director
      Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
      The Credit Ratings/Outlooks were first released by Scope Ratings on 12 November 2021. The Credit Ratings were last updated on 18 September 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
      © 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

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