Research Update: Property Co. Specialfastigheter Sverige Affirmed At 'AA+/A-1+' On Very Strong Enterprise Risk Profile; Outlook Stable Primary Credit Analyst: Gabriel Forss, Stockholm (46) 8-440-5933; gabriel.forss@standardandpoors.com Secondary Contact: Carl Nyrerod, Stockholm (46) 8-440-5919; carl.nyrerod@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 18, 2015 1
Research Update: Property Co. Specialfastigheter Sverige Affirmed At 'AA+/A-1+' On Very Strong Enterprise Risk Overview In line with our expectations for 2015, Specialfastigheter has paid Swedish krona (SEK) 929 million in dividends alongside SEK2,071 million in repayment of share capital to its shareholder, the Swedish government, lowering its equity ratio to 29%, which is within the owner's target of 25%-35%. Although Specialfastigheter's 2015 financing strategy has involved a marked increase in short-term debt, we believe that the company's ample committed bank lines, strong cash flow from operations, and strong access to the capital market ensure a strong liquidity position. We are affirming our 'AA+/A-1+' issuer credit and 'K-1' Nordic regional scale ratings on Specialfastigheter. The stable outlook reflects our expectation that, despite an uptick in short-term debt, Specialfastigheter's very strong enterprise risk profile will support strong financial performance, ensuring robust debt sustainability and adequate internal liquidity. Rating Action On Dec. 18, 2015, Standard & Poor's Ratings Services affirmed its 'AA+' long-term and 'A-1+' short-term issuer credit ratings on Swedish property company Specialfastigheter Sverige AB. The outlook is stable. At the same time, we affirmed our 'K-1' short-term Nordic regional scale rating on the company. Rationale The ratings on Swedish public housing company Specialfastigheter Sverige AB are based on our assessment of the company's 'aa-' stand-alone credit profile (SACP). We also take into account our view of a very high likelihood that the company's owner, the Kingdom of Sweden (unsolicited, AAA/Stable/A-1+), would provide timely and sufficient extraordinary support to the company in the event of financial distress. In accordance with our criteria for government-related entities (GREs), our view of a very high likelihood of extraordinary government support is based on our assessment of Specialfastigheter's: Very important role in Sweden's economy, from a unique position as a provider of essential, state-funded properties built to maintain public safety and national security. Specialfastigheter operates as an independent entity and plays an important role in meeting political objectives and implementation of key national policy; and WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 18, 2015 2
Very strong link with the Swedish government, which owns 100% of Specialfastigheter, is actively involved in defining the company's strategy, appoints its board, and has a long-term commitment to the company. In addition, the Swedish government has a track record of supporting the GRE sector, and any unremedied financial distress at the company would pose significant reputation risk for the government. According to our criteria "Principles of Credit Ratings" (published Feb. 16, 2011, on RatingsDirect), we assess Specialfastigheter's enterprise risk and financial risk profiles, the components of its SACP, by benchmarking against factors described in our criteria for rating public-housing providers. Specialfastigheter owns and manages the majority of Sweden's prisons and several defense and police authority properties. All its tenants are state agencies, most of which provide services deemed essential to Sweden's public safety and national security. Specialfastigheter offers highly specialized and tailor-made premises and benefits from long-lease contracts, which guarantees long-term relationships with tenants and enables stable revenue streams. In September 2015, the average remaining term of Specialfastigheter's lease contract portfolio was 15.1 years (15.6 in September 2014). The terms and conditions do not permit early termination of a contract without full compensation from the tenant for the remainder of the lease. Moreover, all lease contracts contain index clauses offsetting a large part of the risk associated with expenditure increases. Furthermore, long-lease contracts with government agencies ensure minimal vacancies (currently 1.4%) and provide for a very strong enterprise risk profile. Specialfastigheter enjoys a very strong financial risk profile, underpinned by stable and predictable cash flows from operations. We estimate operating cash flows to remain robust in 2015 with an EBITDA margin at 68%. As per our rating approach, we add back capitalized maintenance to our calculation of Specialfastigheter's EBITDA. However, by 2015, we forecast that the company's debt will stand at SEK11.5 billion ( 1.235 billion), up from SEK9 billion at year-end 2014. This increase reflects the debt-financed dividend payments to its shareholder, the Swedish government, in an anticipated move to bring the company's equity to assets ratio (solvency ratio) into the owner's target of 25%-35% of assets. We project this ratio will stand at 30% at year-end 2015. Despite this increase in debt, we expect the EBITDA interest coverage to remain strong at 4.9x by year-end 2015, on par with 2014, reflecting a low interest rate environment and the company's shortened tenure of its debt portfolio. In our base-case scenario through 2017, we expect the company's EBITDA interest coverage will decline slightly but remain strong at above 3.5x. Although we anticipated the increase in debt, we think that Specialfastigheter's balance sheet has lost some of its resilience. We foresee modest capital expenditures in 2016 leading to a stabilization of the company s debt position. By 2017 we expect capital expenditures to pick up pace, followed by debt accumulation of about SEK1 billion compared with 2016. Nevertheless, at year-end 2017, we expect Specialfastigheter's debt to debt and equity to stand at 63%, versus 64% in 2014. This reflects the low levels of investments and debt accumulation in 2016. However, WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 18, 2015 3
we expect that the increased maintenance expenditures in 2017 will weigh on the company's EBITDA. As such, we expect the company's debt to EBITDA to trend above 10x by 2017. Liquidity We assess Specialfastigheter's liquidity as strong based on its adequate internal liquidity and strong market access. In 2015, Specialfastigheter repaid share capital of SEK2,071 million together with dividends of SEK929 million to its owner, of which about two-thirds were debt financed. Specifically, they paid SEK1 billion in May and SEK2 billion in August. Prior to these payouts, Specialfastigheter had accumulated liquidity through borrowings. In its 2015 funding activities, Specialfastigheter has enforced its short-dated debt profile. We estimate that about 40% of Specialfastigheter's SEK11.5 billion debt portfolio will mature over the 12 months started Nov. 30, 2015, compared with 23% one year earlier. This primarily relates to an increase of commercial paper borrowings accounting for about 30% of the total debt stock. Therefore, we observe a marked weakening in the company's liquidity position compared with the very strong level in 2014. Importantly, Specialfastigheter has maintained ample committed bank facilities of SEK4.25 billion, which together with robust funds from operations of SEK1.1 billion (before interest payments) and REPO-eligible 'AAA'-rated covered bonds holding of about SEK500 million make up the company's liquidity sources. We employ 5% haircuts on the company s covered bond holdings, in line with our criteria. For the 12 months started Nov. 30, 2015, Specialfastigheter's liquidity uses comprise SEK4.3 billion in maturing loans, interest expenses of SEK264, ordinary dividends of SEK440million, and our estimate of committed capital spending of SEK550billion. We estimate that the company's liquidity sources will cover 106% of its liquidity over this period. In addition, we take into account Specialfastigheter's strong market access in assessing its overall liquidity position. The company is viewed as a stable and trusted issuer and has successfully tapped the market for financing, even during the financial market crisis of 2008-2009. Outlook The stable outlook reflects our expectation that over the next two years Specialfastigheter's very strong enterprise risk profile will support strong financial performance, ensuring robust debt sustainability and adequate internal liquidity, despite the company's uptick in leverage over 2015. The ratings could come under pressure if the company's link to, or role for, the government were to decline. We could also take a negative rating action if the SACP were to weaken, for example, due to deterioration in Specialfastigheter's liquidity position stemming from lax financial risk management. In this scenario, we may WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 18, 2015 4
revise downward our assessments of the company's financial policies and liquidity and, in turn, lower the ratings. We would consider a positive rating action if, in our view, the company's link to, or role for, the government were to improve. Ratings upside could also follow a strengthening of the SACP, for example, thanks to a better liquidity position and incremental strengthening of the company's enterprise risk profile. Specialfastigheter Sverige AB Financial Statistics --Fiscal year-end Dec. 31-- (Mil. SEK) 2012 2013 2014 2015bc 2016bc 2017bc Revenues 1,767 1,858 1,872 1,721 1,753 1,808 EBITDA 1,300 1,167 1,164 1,170 1,121 1,027 Operating income 1,300 1,167 1,164 1,170 1,121 1,027 Net income from continuing operations 1,328 1,301 1,390 906 849 913 Interest expense 292.0 277.0 238.0 240.4 264.4 267.0 Funds from operations 1,008.0 890.0 926.0 929.6 856.6 760.0 Capital expenditures 1,094 277 146 397 549 1,276 Total assets 19,142 19,818 20,564 21,122 21,629 23,201 Debt 9,847 9,422 8,993 11,505 11,421 12,379 Equity 6,628 7,564 8,475 6,492 6,920 7,378 EBITDA margin (%) 73.6 62.8 62.2 68.0 63.9 56.8 EBITDA interest coverage (x) 4.5 4.2 4.9 4.9 4.2 3.8 Operating cash flow/debt (%) 8.9 11.0 12.4 7.1 10.5 8.6 Debt/EBITDA (x) 7.6 8.1 7.7 9.8 10.2 12.1 Debt/debt and equity (%) 59.8 55.5 51.5 63.9 62.3 62.7 The data and ratios above result in part from Standard & Poor's own calculations. The main sources are the financial statements and budgets, as provided by the issuer. SEK--Swedish krona. bc--base case, reflects Standard & Poor's expectations of the most likely scenario. Related Criteria And Research Related Criteria General Criteria: Rating Government-Related Entities: Methodology And Assumptions - March 25, 2015 Criteria - Governments - General: Methodology For Rating Public And Nonprofit Social Housing Providers - December 17, 2014 General Criteria: Standard & Poor's National And Regional Scale Mapping Tables - September 30, 2014 General Criteria: National And Regional Scale Credit Ratings - September 22, 2014 General Criteria: Principles Of Credit Ratings - February 16, 2011 General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating - October 01, 2010 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 18, 2015 5
Related Research Specialfastigheter Sverige AB, Dec. 22, 2014 Ratings List Rating To From Specialfastigheter Sverige AB Issuer credit rating Foreign and Local Currency AA+/Stable/A-1+ AA+/Stable/A-1+ Nordic Regional Scale --/--/K-1 --/--/K-1 Senior Unsecured Local Currency AA+ AA+ Commercial Paper Nordic Regional Scale K-1 K-1 Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420- 6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. Additional Contact: International Public Finance Ratings Europe; PublicFinanceEurope@standardandpoors.com WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 18, 2015 6
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