Sweden’s Property Crunch Worsens as Another Landlord Cut to Junk

Charles Daly and Anton Wilen, Bloomberg News

Buildings on the skyline by the harbour in Stockholm, Sweden, on Sunday, June 11, 2023. Swedish households are becoming more optimistic about the development in the housing market, according to a survey from the country’s largest bank. Photographer: Andrey Rudakov/Bloomberg , Bloomberg

(Bloomberg) -- Sweden’s beleaguered property sector suffered another blow when one of the largest office landlords in the capital was downgraded to junk status by Moody’s Investors Service.

Stockholm-based FastPartner AB saw its rating cut one step to Ba1 with the possibility for further downgrades to come if the company cannot shore up its finances. The cut “reflects the rapid increase in interest rates combined with subsequently challenging capital markets,” Moody’s said in a statement late on Friday night.

The company’s shares fell as much as 10.4% when trading started in Stockholm on Monday. Its floating-rate notes due in May 2025 were marked half a point lower at a bid price of 91.6, according to data compiled by Bloomberg.

The property firm, with 80% of its rental value from the Greater Stockholm area, joins a growing list of so-called fallen angels that have seen their ratings leave the investment grade bracket and enter high yield. The rating actions are exacerbating a financing crunch in a market that is seen as a canary in the coal mine for Europe’s real estate industry given much of the debt is short term and floating rate.

Armed with an investment grade rating, companies such as Samhallsbyggnadsbolaget i Norden AB and Fastighets AB Balder were able to raise billions of dollars of debt on the bond markets during the era of zero interest rates. But with a jump in interest rates and the prospect of falling property valuations, landlords have been increasingly unable to defend their credit ratings despite efforts to offload assets and seek alternative bank financing.

For FastPartner, Moody’s said that the benefits of inflation-linked rents over the coming months “are unlikely to be sufficient to offset pressure on valuations and from higher funding costs.” The rating agency expects to conclude the review info a further downgrade “within the next weeks.”

While FastPartner’s interest coverage ratio has weakened due to rising interest rates, “it’s more important to have sufficient liquidity,” FastPartner Chief Executive Officer Sven-Olof Johansson said by phone. His firm is “almost top of the class” with funding secured for almost three years, he added.

The downgrade by Moody’s “will only have limited significance,” Johansson said. “Then you could say that we have had too short fixed interest periods, but on the other hand we gained a lot on that strategy earlier. So now it’s payback time.”

(Adds CEO comments from 7th paragraph.)