(Bloomberg) -- Landlord Heimstaden Bostad AB sold 2.8 billion Swedish kronor ($266 million) worth of apartments in the first six months of this year, about 428 million kronor ahead of schedule, while racing to avert a downgrade of its credit rating to junk levels.
Taking the 363 units sold in the second quarter into account, the residential property owner has now divested apartments totaling 4 billion kronor as part of a 20-billion-kronor asset disposal program, according to its most recent earnings report. Proceeds from the sales will minimize the need for future bank financing.
“We have outperformed in the pace of the ramp-up of the disposal program,” co-Chief Executive Officer Christian Fladeland said by phone. He also added that the market for property transactions is improving for deals ranging between €50 and €100 million.
As with fellow struggling landlord Samhallsbyggnadsbolaget i Norden AB, or SBB, the company was caught wrong-footed by last year’s sharp jump in interest rates. Heimstaden Bostad borrowed heavily on European bond markets in the era of cheap money and currently has a debt pile totaling about $11.8 billion, about 84% of which is made up of bonds.
What differentiates Heimstaden from SBB is its larger geographical footprint of properties, which has enabled it to tap into a bigger pool of European banks for secured financing as public bond markets remain effectively closed. Earlier this month, the landlord refinanced part of its portfolio in the Netherlands through a new €750 million sustainability-linked loan maturing in 2031. ING Bank NV and Natixis Pfandbriefbank AG provided the financing.
Heimstaden Bostad said in the report that it’ll continue “to focus on local asset-backed financing as capital markets remain uncompetitive to alternative funding sources.”
Rating Pressures
In March, the landlord saw its credit rating cut to one step above junk by Fitch Ratings, matching the assessment of Standard & Poor’s, which has rated the company BBB- since December. Both rating firms have the company on negative outlook, meaning that unless there is an improvement in key credit metrics a downgrade into high yield is a real possibility.
Further rating cuts would damage Heimstaden’s business model, which relies on a large, cheap pool of investment-grade bond investors to fund many of its operations. To protect its investment-grade status, the company scrapped its dividend and launched the so-called privatization plan. While there had been talk of a new equity injection, so far the company has so far focused on selling off apartments in markets such as the Netherlands and Denmark.
“The return to a stable outlook from S&P and Fitch is a key priority for the management and initiatives taken,” the company said in the report. Should the privatization program succeed, it will reduce the need for secured lending, resulting in “additional headroom” under key rating agency metrics, it added.
Still, senior unsecured bond investors remain concerned. Heimstaden’s notes due in September 2029 are currently quoted at distressed levels of 77.6 euro cents, according to data compiled by Bloomberg. With a corresponding yield of about 6%, it suggests the market is continuing to view Heimstaden risk as sub-investment grade.
Adding to near-term challenges is a criminal investigation in Sweden concerning pension fund Alecta’s 39% stake in Heimstaden Bostad. While public prosecutors involved in the bribery probe have yet to make any findings public, there is a risk that former or existing managers may face criminal charges.
While Fladeland said he “wasn’t concerned” about the probe, he noted that “it’s a frustrating situation to be in.” He added that so long as there remains a “company-specific overhang” surrounding Alecta and its shareholders, bond markets are not an attractive option.
(Updates with CEO interview comments throughout.)
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