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Rating action

Scope Ratings GmbH (Scope) today affirmed Fastpartner AB's issuer rating at BB and revised the Outlook to Positive from Negative. The company's senior unsecured debt rating is affirmed at BB and the short-term debt rating is affirmed at S-3.

The outlook revision is driven by a faster-than-expected decline in interest rates in Sweden, leading to a projected improvement in Fastpartner's interest cover to over 2.2x in 2025. The company's tightened financial policy, with a fixed interest rate target of at least 30%, compared to almost no hedging before, and its tightened loan-to-value target of 45%, combined with a net debt/EBITDA target of <10x, bodes well for a recovery in credit metrics.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BBB- Fastpartner’s business risk profile benefits from its market position in the Swedish real estate market with Scope-adjusted total assets of SEK 36.0bn (EUR 3.1bn) and a total lettable area of 1.6m sq. m as of end-June 2024. The company's visibility in the market supports access to financing, as evidenced by regular issuances in debt and equity markets, which have continued through a challenging second half of 2023 and first half of 2024. Fastpartner's strongest foothold is in Stockholm, with additional exposure to Malmö, Gothenburg and southern Sweden.

Tenant diversification remains moderate, with the top three tenants accounting for 9.2% and the top 10 for 18.6% of rental income as at Q2 2024. In addition, the credit quality of the top 20 tenants is considered investment grade, significantly reducing the risk of cash flow deterioration due to a single tenant default or delayed payment. Fastpartner’s asset quality benefits from 82% of portfolio assets (as measured by fair value) being located in metropolitan areas with more than one million inhabitants and demonstrating cash flow visibility with a stable weighted average unexpired lease term of 4.5 years as at Q2 2024, which is above average compared to Nordic peers (four years). Profitability further supports the rating, with Fastpartner demonstrating stable Scope-adjusted EBTDA* margins just below 70%.

Fastpartner's business risk profile remains somewhat constrained by its relatively high geographical concentration, as it is solely focused on Sweden. Stockholm alone accounts for 77% of assets by fair value and 72% of revenues. This concentration is partially mitigated by: i) Stockholm's status as an 'A' location with large and liquid property markets; and ii) Sweden's mature and stable economy, whose strong welfare system can cushion the impact of economic turbulence. In the absence of acquisitions, which have historically depressed Fastpartner's occupancy rate due to its growth orientation, it remained at around 93%, demonstrating a change in strategy and the quality of the assets.

Financial risk profile: BB. Fastpartner's financial risk profile has historically benefited from moderate leverage, as measured by a loan-to-value (LTV) ratio below 50%, and strong debt coverage of over 3x. While the LTV ratio remains intact below 50% despite the significant fair value write-downs observed on the asset base during 2023, the exposure to predominantly floating rate debt has seen the interest cover ratio declining in the face of rapid and significant increases in central bank rates, prompting the company to proactively discuss covenant levels with its banks. Interest cover fell to 1.8x at the end of 2023 from 3.5x the previous year and has remained at this level since.

The Swedish Riksbank (central bank) declared the interest rate peak (4%) in November 2023, with the first rate cut in May 2024 (3.75%) and again in August (3.5%). At its most recent meeting, the central bank indicated that it would cut rates 2-3 more times during the rest of 2024. Given Fastpartner's continued high sensitivity to floating rates, the company's interest cover is expected to recover slightly to 1.9x in YE2024 following the already announced cuts, with a strong recovery to 2.5x in 2025 and beyond if the indicated rate cuts materialise.

Fastpartner has also updated its financial policy over the last twelve months to address market concerns and intends to fix at least 30% of outstanding debt for more than 3 years. This change is already visible in its debt structure, where the fixed/hedged portion has increased to 24% as of August 2024 from 12% last year. Scope welcomes the increased hedging policy, which will add downside protection to the ratio, but notes that the 30% level is still low by peer standards.

Fastpartner's leverage, as measured by the Scope-adjusted loan-to-value ratio, has been relatively stable over the last 12 months, increasing slightly to 49% from 48% at the end of June 2024, mainly due to fair value adjustments as the portfolio remained stable. Scope expects the loan-to-value ratio to remain below 50%, given the small increases in market values already observed and the declining yield curve, which should have a positive impact on market values. Scope is further reassured by the recent tightening of Fastpartner's financial policy, with the target loan-to-value ratio reduced to 45% from 48%, which bodes well for the ongoing deleveraging strategy. Leverage, as measured by scope-adjusted debt/EBITDA, has strengthened to 11.5x at June 2024 from 12.3x a year earlier, thanks to the aforementioned debt repayments. Going forward, the ratio is expected to slightly decrease further based on expected EBITDA growth, while Scope-adjusted debt is expected to continue to decline.

Liquidity: adequate. Fastpartner’s liquidity is adequate given that sources (SEK 30m in cash and SEK 1.9bn in committed undrawn credit lines as at Q2 2024 as well as SEK 550m in free operating cash flow forecasted for the next 12 months) cover uses (SEK 2.2bn in short-term debt as at Q2 2024) by about 1.2x for the next 12 months until June 2025. On Scope’s calculations, all upcoming capital market maturities until June 2026 can be covered by available cash, committed credit lines and internal cash flow generation, while the secured bank debt in 2026 will need to be refinanced by banks and cannot be covered by currently available liquidity. Scope believes that liquidity is a manageable risk in the short-to-medium term as sufficient headroom is provided by: i) a reasonably low LTV of 33% on secured debt, providing ample headroom to increase debt on existing secured debt; and ii) the company’s continued access to capital markets as demonstrated by commercial paper and its good banking relationships with a wide range of potential funding sources. Fastpartner has realigned all interest coverage covenants in discussion with banks over the last 12 months to the same level of 1.5x, so the tightness observed at the last review - in a different interest rate environment - has eased.

Supplementary rating drivers: credit-neutral. The rating has no adjustments related to financial policy, peer group considerations, parent support, or governance and structure.

Outlook and rating sensitivities

The Positive Outlook reflects the reversal of pressure on the interest coverage ratio, as the company is still predominantly exposed to floating rate debt. Scope expects the interest coverage ratio, which has fallen to 1.8x in line with our expectations, to return to above 2.2x within the next 12 months as a result of the interest rate cuts already implemented and led by the Swedish central bank. Scope also expects a significant improvement in the hedging policy for floating rate debt exposure, as supported by the revised financial policy. Leverage, as measured by both loan-to-value and SaD/EBITDA, is expected to improve throughout the forecast period, based on Fastpartner's deleveraging strategy embedded in its financial policy, and could be further supported by capitalisation rate contraction as headline rates decline.

The upside scenarios for the ratings and Outlooks are (collectively):

1. Interest cover to improve above 2.2x on a sustained basis
    
2. Significantly increased level of interest rate hedging

The downside scenarios for the ratings and Outlooks are (individually)

1. Interest cover to remain at or below 2.2x on a sustained basis
    
2. Lack of significantly increased level of interest rate hedging

Debt ratings

Fastpartner currently has SEK 5.3bn of senior unsecured debt outstanding, which comprises SEK 85m in commercial paper and SEK 5.2bn in senior unsecured bonds (of which 100% was issued under its green framework). These senior unsecured obligations benefit from a property pool of SEK 8.3bn in truly unencumbered assets in addition to SEK 4.3bn in unencumbered parts of secured properties (with a difference of secured LTV up to 60%). Scope assesses the pool of unencumbered assets at SEK 12.5bn, which provides around 240% coverage by unsecured assets. Based on Scope’s General Corporate Rating methodology and reasonable discounts on the company’s asset base, Scope expects a superior recovery for senior unsecured debt. However, there are uncertainties around advance rates in the case of a hypothetical issuer default. Scope also highlights the high sensitivity of recovery expectations to advance rates and the volume of senior secured debt at the time of a hypothetical default, resulting in the affirmation of the senior unsecured debt rating at BB (in line with that of the issuer).

The S-3 short-term debt rating is based on the BB/Positive issuer rating and supported by adequate liquidity, good banking relationships, and access to secured bank and commercial paper funding sources with regular issuances of various equity share classes and bonds.

Environmental, social and governance (ESG) factors

Fastpartner’s efforts in high-grading its portfolio by reduced emissions, and the usage of 100% renewable energy is a requirement for some multinational tenants and a desirable feature for the remainder, which increases the appeal of its properties to existing and potential new clients and assures a continued high occupancy and related cash-flows also in a potentially softer economic environment and/or changing demand patterns.

Overall, ESG factors have no impact on this credit rating action.

All rating actions and rated entities

Fastpartner AB

Issuer rating: BB/Positive, Outlook change

Senior unsecured* debt rating: BB, affirmation

Short-term debt rating: S-3, affirmation

*All credit metrics refer to Scope-adjusted figures.

*Editorial note: The text was amended on 2 September 2024. In the initial publication, the text read "secured".

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 and/or Outlook, (General Corporate Rating Methodology, 16 October 2023; European Real Estate Rating Methodology, 28 March 2024), 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.
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 these 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 and/or Outlook 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: Eugenio Piliego, Senior Director
The Credit Ratings/Outlook were first released by Scope Ratings on 31 August 2020. The Credit Ratings/Outlook were last updated on 7 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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

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.