Sweden Landlord Heimstaden Mulls Rights Issue to Save Rating

One of the biggest residential property companies in Europe has adjusted its financial policy and is considering raising fresh capital to defend its investment-grade credit rating.

(Bloomberg) — One of the biggest residential property companies in Europe has adjusted its financial policy and is considering raising fresh capital to defend its investment-grade credit rating.

Privately-owned Heimstaden Bostad AB has remained out of the glare of the public stock markets for much of Europe’s unfolding real estate crisis, but with a portfolio of 160,000 homes worth about $31 billion it has rapidly grown into a major player behind the likes of Vonovia SE and Unibail-Rodamco-Westfield.

The Swedish company is now assessing measures including a “capital injection to ensure ongoing adherence” with its BBB rating at S&P Global Ratings, according to comments made in the second-quarter report.

The potential capital raise could take the form of a rights issue, said Heimstaden Bostad’s Chief Investment Officer Christian Fladeland by phone.

As with fellow landlord, SBB, Heimstaden Bostad is increasingly finding itself drawn into the epicenter of one of the world’s worst property routs, where home prices in Sweden are expected to tumble 20% from a peak in early 2022. That, combined with billions of dollars of bond debt that is short term and floating rate, has made commercial property borrowers in the Nordic nation the canary in the coal mine for the sector’s funding crunch.

With bond markets all but closed for most borrowers, Heimstaden Bostad said it would now focus on accessing bank financing in the respective local markets where it operates. Similarly, it plans to boost the level of secured financing in the short term.

The credit rating has been a vital funding tool for the pan-European landlord to build up $11.8 billion of bond debt in the cheap-money era.

Fladeland said the company would look at asset-backed funding — either bank loans or mortgages — to cover its maturing bond debt in 2024 and 2025. 

“We don’t foresee that the capital markets will open at any reasonable price points within the coming months,” the CIO said.

In the second quarter, the landlord posted a net loss of 6.8 billion kronor ($623 million), largely driven by write-downs in its property portfolio — which also increased the loan-to-value ratio to 54.4%. The company’s interest coverage ratio — a key metric signaling its ability to service debt — shrank to 2.4 times from 4 times a year earlier.

What Bloomberg Intelligence Says:

Heimstaden Bostad’s rent rises and a potential capital injection are positive, yet the Swedish property company continues to face ratings pressure, with its bonds likely to remain discounted. More focus may be given to the decision not to include an auditor’s review in the 2Q earnings report, along with the change in financial policy thresholds (though the latter mirrors S&P’s prior move) 

—Tolu M Alamutu, BI credit analyst (read more here)

Heimstaden Bostad was created in 2013 through a joint venture between Norwegian property mogul Ivar Tollefsen and Alecta, the Swedish pension fund caught up in the Silicon Valley Bank fallout earlier this spring. Tollefsen’s real estate company Heimstaden AB owns 50% of the voting rights in the landlord while Alecta has a 30% share. The remainder of the voting rights is held by Swedish institutional investors such as Folksam.

The company’s CIO confirmed there would be no payout to the owners this year. “Given we had a negative profit in the first half, it’s quite obvious that unless there is a recovery there won’t be any ordinary dividend being paid,” Fladeland said.

In April, Alecta wrote down its holding in Heimstaden Bostad by 3 billion kronor amid a real estate crisis in Europe that counts Sweden as its epicenter. Two years ago Heimstaden Bostad was crowned one of the biggest landlords in Europe after using a mix of debt and equity to buy a portfolio of assets worth 92.5 billion kronor.

The company is rated BBB by both S&P Global Ratings and Fitch Ratings. However, its investment grade ratings were placed on negative outlook last year by both rating firms. The ability to service its debt was cited as a key reason in each case.

The second quarter report also showed that Heimstaden Bostad posted a fair value loss of 7.4 billion kronor on its property portfolio. The decrease was driven by what it called “sentiment-based yield increases” that outweighed the positive effects of rent increases.

The report is “slightly credit positive on the back of the company’s communication around its commitment to the ‘BBB’ S&P rating and a potential capital injection,” Danske Bank credit analyst Marcus Gustavsson said in a note to clients.

(Adds interview comments with CIO and analysis from BI.)

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