Primary Credit Analyst: Andrea Croner, Stockholm (46) 8-440-5921; andrea.croner@standardandpoors.com Secondary Contact: Carl Nyrerod, Stockholm (46) 8-440-5919; carl.nyrerod@standardandpoors.com Table Of Contents Major Rating Factors Rationale Outlook Extraordinary Government Support Business Description Enterprise Profile: Very Strong, Characterized By Low Industry Risk And Robust Market Position Industry Risk: Low Competitive Risk Ensures Resilience To Cyclicality Economic Fundamentals And Market Dependencies: High Demand Sustains Predictability Market Position: High Asset Quality And Conservative Strategy Financial Profile: Strong On Conservative Financial Policies And Robust Balance Sheet Financial Performance: Satisfactory WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 18, 2013 1
Table Of Contents (cont.) Debt Profile: Robust Balance Sheet With Strong LTV Ratio Liquidity: Adequate Coverage Financial Policies: Conservative Policies And Planning Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 18, 2013 2
Major Rating Factors Strengths: "High" likelihood of extraordinary support due to "very strong" link to and "important" role for its owner, the City of Göteborg. "Very strong" enterprise profile owing to low industry risk, very strong economic fundamentals, and strong market position in Göteborg's rental property market. High asset quality with low vacancies. "Strong" financial profile due to conservative financial policies and low leverage. Issuer Credit Rating AA-/Stable/A-1+ Nordic Regional Scale --/--/K-1 Weaknesses: Slightly short-term debt structure with exposure to refinancing risk. Expected debt accumulation to fund the investment program. Rationale The ratings on Swedish public housing group Förvaltnings AB Framtiden (Framtiden) are based on our assessment of its stand-alone credit profile (SACP) at 'a+' and our opinion that there is a "high" likelihood that the group's owner, the City of Göteborg (AA+/Stable/A-1+), would provide timely and sufficient extraordinary support in the event of financial distress. Our assessment of Framtiden's SACP is supported by the group's "very strong" enterprise profile, stemming from low industry risk, very strong economic fundamentals, and strong market position in Göteborg's rental property market. The group's high asset quality and "strong" financial profile, which reflect its conservative financial policies and low leverage, further support our assessment of its SACP. These strengths are partly offset by Framtiden's slightly short-term debt structure, which creates exposure to refinancing risk, and the group's investment program, which could lead to further debt accumulation. In accordance with our criteria for government-related entities (GREs), our view that there is a "high" likelihood of extraordinary government support is based on our assessment of Framtiden's: "Important" role for Göteborg, where the group is an important contributor to the city's overall infrastructure and public policy; and "Very strong" link with the city, which is actively involved in defining the group's strategy, appoints its board of directors, and intends to maintain its 100% ownership over the medium term. We consider Framtiden to have a "very strong" enterprise profile due to its low industry risk and strong market position. Specifically, the group has 70,484 housing units in the Göteborg area. Framtiden benefits from very strong demand for its rental apartments in the growing city of Göteborg, which provides for minimal vacancies in its housing WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 18, 2013 3
stock. We calculate the average dwelling price for private houses in Göteborg at a high 143% of the national average, which, combined with very strong population growth of 1.2% annually over the past three years, suggests very strong local economic fundamentals. Framtiden's properties are generally well maintained, and the company has increased its maintenance levels over the past few years. We forecast that maintenance levels will continue to rise to Swedish krona (SEK) 1.3 billion ($0.2 billion) by year-end 2015, compared with SEK1.2 billion in 2012. We assess Framtiden's financial profile as "strong" due to its conservative financial policies and robust balance sheet. Framtiden is continuing to expand and intends to invest about SEK1.4 billion in 2013-2015. With these planned investments adding SEK0.7 billion in net new loans per year, we forecast the company's ratio of debt to debt and equity will increase to 66% by 2015 from 64% in 2012. However, we believe there is ample room for the group to absorb new financing thanks to a strong loan-to-value (LTV) ratio of 25% and headroom within its interest coverage ratios. In our base-case scenario, we calculate Framtiden's EBITDA interest coverage at a strong 3.4x in 2015, against 2.9x in 2012, and debt to EBITDA at an adequate 10.0x, compared with 9.3x in 2012. Like its domestic peers, Framtiden is exposed to the risks associated with its somewhat short-term debt maturity profile. In June 2013, Framtiden's average time to debt maturity was 2.4 years. The average interest fixing period was 2.9 years, exposing performance and interest coverage ratios to higher interest rates. However, interest rate caps and committed bank facilities partly offset these risks. Liquidity We consider Framtiden's liquidity position to be "adequate" as liquidity sources of SEK6.2 billion cover about 70% of uses of SEK9.4 billion, combined with what we view as strong market access. About SEK7.5 billion of Framtiden's total loan portfolio matures over the coming 12 months. In addition, we calculate that interest expense and capital spending add to Framtiden's liquidity needs over the next 12 months. In terms of available liquidity, Framtiden has liquidity facilities of SEK5.1 billion. Together with cash and liquid assets and inflows of SEK0.6 billion, we calculate the company's available liquidity, including bank facilities, at 70% of uses of liquidity over the next 12 months. Moreover, we acknowledge Framtiden's strong market access in assessing its overall liquidity position. Outlook The stable outlook reflects our expectation that Framtiden's SACP will remain at its current level, supported by the group's "very strong" enterprise profile and "strong" financial profile. We expect no material changes in Framtiden's ownership and support structure to the extent that it would affect our view of the group's role for or link to Göteborg. We could raise the ratings if Framtiden's financial profile were to strengthen. This could happen if liquidity sources consistently exceed uses of funds, reaching more than 125% liquidity coverage, or if the debt financing of investments were to increase notably less than we expect. We could also raise the ratings if we were to positively reassess Framtiden's role for or link to Göteborg. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 18, 2013 4
The ratings could come under pressure if Framtiden's financial profile were to deteriorate. This could happen if the group's investment program were to sharply increase leverage or if its liquidity position relative to short-term debt maturities were to weaken to less than 50% of uses of funds. Moreover, we could consider a negative rating action if Framtiden's role for or link to Göteborg were to weaken. Extraordinary Government Support We use our criteria for GREs to assess Framtiden's credit quality. For more information, see "Rating Government-Related Entities: Methodology And Assumptions," published Dec. 9, 2010, on RatingsDirect on the Global Credit Portal. Under this approach, we consider Framtiden's role for Göteborg to be "important". Although the group operates essentially as an independent entity, it is central to the city's infrastructure and fulfils an important public policy role. Moreover, we consider the link between Framtiden and Göteborg to be "very strong". Consequently, we believe that there is a "high" likelihood of extraordinary support in the event of financial distress. The city of Göteborg is actively involved in defining the group's strategy and intends to maintain its 100% ownership of Framtiden over the medium term. Framtiden is closely associated with the city of Göteborg, and we would consider it a significant reputational risk if the city were to neglect the group in the event of financial distress. Business Description Framtiden is effectively a holding company with 10 wholly-owned subsidiaries. The group is responsible for specific strategic tasks and the coordination of accounting, finance, information technology, and corporate communications functions, as well as the general development of the city. In view of the cash flow patterns within the group and the existing tools for steering cash and capital allocation, we equalize the ratings on Framtiden with our analysis of the consolidated group. Framtiden is the leading provider of rental housing in Göteborg. The group owns and manages 70,484 residential dwellings, a major sport arena, and municipal car parking operations. The largest entities in the group are the housing companies Bostads AB Poseidon, Göteborgs stads bostadsaktiebolag, and Familjebostäder i Göteborg AB. Together, these three subsidiaries represent 83% of total turnover. Framtiden's revenue base is robust, and in 2012 the group's property portfolio generated about SEK5.0 billion of rental revenue, of which 87% came from housing rents. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 18, 2013 5
Enterprise Profile: Very Strong, Characterized By Low Industry Risk And Robust Market Position We consider Framtiden to have a "very strong" enterprise profile on the basis of the group's low industry risk and very strong economic fundamentals in its area of operations. Framtiden's robust market position and strong operational performance also support its very strong enterprise profile. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 18, 2013 6
Industry Risk: Low Competitive Risk Ensures Resilience To Cyclicality In line with our criteria, we assess the risk of the global social and public housing industry as "low". Competitive risk is also low, owing to effective barriers to entry. The public housing industry is capital intensive, which makes it costly for new companies to enter the market. Economic Fundamentals And Market Dependencies: High Demand Sustains Predictability Framtiden manages 70,484 housing units in Göteborg, where there is a very strong, unsatisfied demand for rental apartments. We calculate the average price for private dwellings in Göteborg at a high 143% of the national average, which, combined with a very strong population growth of 1.2% annually over the past three years, suggests very strong local economic fundamentals. In addition, we expect that vacancies will remain close to zero over the next few years, which suggests predictable operating performance. Market Position: High Asset Quality And Conservative Strategy Strategy and management: Positive for Framtiden's enterprise profile We take a positive view of Framtiden's strategy and management. Specifically, the group's strategic planning is conservative and sets long-term goals for financial and operational performance. Framtiden's management has strong expertise and experience in the group's operating segments. The group has well established processes and procedures for budgeting and follow-up. In addition, Framtiden has instituted a comprehensive risk management policy which enables it to effectively monitor key risks. Asset quality and operational performance: Well-maintained assets and strong operational performance Framtiden's properties are generally well maintained. Over the past few years, Framtiden has continuously increased its maintenance levels. We forecast that maintenance will continue to rise to SEK1.3 billion (SEK255 per square meter) by year-end 2015, compared with SEK1.2 billion in 2012 (SEK233 per square meter). This is high compared with the Swedish Association of Public Housing average of SEK177 per square meter. According to Standard & Poor's criteria, a good proxy for asset quality and operational performance is the company's vacancy rate and average age of the portfolio. Framtiden's comprehensive maintenance work reduces the effective average age of its property portfolio to 38 years. In addition, as housing vacancies are negligible, we consider that the company has strong buffers to withstand adverse market-related shocks. Financial Profile: Strong On Conservative Financial Policies And Robust Balance Sheet We consider Framtiden's financial profile to be "strong" based on the group's conservative financial policies, robust WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 18, 2013 7
balance sheet, and sound financial performance. Financial Performance: Satisfactory Framtiden's ability to satisfactorily generate revenues is exemplified by our assessment of EBITDA to revenues at 30%. In 2014, we forecast EBITDA to revenues will increase marginally to a sound 30.6% owing to continued efficiency enhancements, compared with 30.2% a year earlier. By year-end 2015, we expect EBITDA to revenues of 30.9%. Debt Profile: Robust Balance Sheet With Strong LTV Ratio In our base-case scenario, we calculate Framtiden's EBITDA interest coverage at a strong 3.1x and debt to EBITDA at an adequate 9.9x. At year-end 2012, Framtiden's debt to debt and equity stood at a robust 64%, compared to 66% in 2011. The market valuation of Framtiden's properties was a high SEK62.6 billion in 2012, up from SEK58.9 billion a year earlier. The group's LTV ratio stands at a very healthy 25%, which signals a comfortable buffer for debt accumulation. Framtiden has significant unencumbered assets and we take this positively into account when assessing its debt profile. Framtiden is continuing its expansionary phase and intends to invest SEK1.4 billion in new buildings in 2013-2015. This will result in 400-600 new apartments annually over the next few years. With these planned investments, adding about SEK720 million in net new loans per year, we forecast Framtiden's debt-to-ebitda ratio will increase to 10.0x by 2015 from 9.3x in 2012. Short debt profile The group funds itself through a SEK4.0 billion commercial paper program, a SEK10.0 billion medium-term note program, and bank loans of SEK5.8 billion. Like its domestic peers, Framtiden is exposed to risks associated with a slightly short-term debt maturity profile. In June 2013, its average time to debt maturity was 2.4 years. The average interest fixing period was 2.9 years, exposing performance and interest coverage ratios to higher interest rates. However, interest rate caps and committed bank facilities partly offset these risks. We take Framtiden's short-term debt maturities negatively into account when assessing the company's debt profile. Liquidity: Adequate Coverage We consider Framtiden's liquidity position to be "adequate" as liquidity sources of SEK6.2 billion cover about 70% of uses of SEK9.4 billion, combined with what we view as strong market access. About SEK7.5 billion of Framtiden's total loan portfolio matures over the coming 12 months. In addition, we calculate that interest expense and capital spending add to Framtiden's liquidity needs over the next 12 months. In terms of available liquidity, Framtiden has liquidity facilities of SEK5.1 billion. Together with cash and liquid assets, combined with inflows of SEK0.6 billion, we calculate the company's available liquidity, including bank facilities, at WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 18, 2013 8
about 70% of uses of liquidity over the next 12 months. Moreover, we acknowledge Framtiden's strong market access in assessing its overall liquidity position. Financial Policies: Conservative Policies And Planning We consider Framtiden to have conservative financial policies. The group has multiyear financial and capital plans in which future issues are identified and action plans developed. Well documented and realistic assumptions are incorporated in the group's long-term planning policies. In addition, financial prudence is enforced by Framtiden's budgets which are based on a strong commitment to financial discipline. Förvaltnings AB Framtiden Financial Summary --Fiscal year ended Dec. 31-- (Mil. SEK) 2015 2014 2013 2012 2011 2010 2009 Revenues 5,712 5,573 5,437 5,498 5,220 5,096 4,811 EBITDA 1,768 1,703 1,641 1,664 1,472 1,346 1,308 Operating income 778 732 689 762 645 598 719 Funds from operations (FFO) 671 626 580 1,035 964 884 797 Debt and equity 26,660 25,715 24,827 23,973 23,758 22,975 22,482 Adjusted ratios EBITDA margin (%) 30.9 30.6 30.2 30.3 28.2 26.4 27.2 EBITDA interest coverage (x) 3.4 3.3 3.2 2.9 2.7 2.8 2.5 EBIT interest coverage (x) 1.5 1.4 1.3 1.3 1.2 1.2 1.4 FFO/debt (%) 3.8 3.7 3.6 6.7 6.2 6.0 5.5 Cash flow from operations/debt (%) 3.8 3.7 3.6 4.1 6.0 6.1 1.1 Debt/EBITDA (x) 10.0 9.9 9.9 9.3 10.6 11.0 11.0 Debt/debt and equity (%) 66.1 65.7 65.1 64.5 65.6 64.6 64.2 SEK-Swedish krona Related Criteria And Research Public And Nonprofit Social Housing Providers: Methodology And Assumptions, July 11, 2012 Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 Ratings Detail (As Of November 18, 2013) Forvaltnings AB Framtiden Issuer Credit Rating Nordic Regional Scale Issuer Credit Ratings History 01-Nov-2011 09-Sep-2009 AA-/Stable/A-1+ --/--/K-1 AA-/Stable/A-1+ A+/Stable/A-1 09-Sep-2009 Nordic Regional Scale --/--/K-1 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 18, 2013 9
Ratings Detail (As Of November 18, 2013) (cont.) *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Additional Contact: International Public Finance Ratings Europe; PublicFinanceEurope@standardandpoors.com WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 18, 2013 10
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