Financial Market

Research: Rating Action: Moody’s downgrades Castellum AB to Baa3, outlook stable

Stockholm, July 15, 2022 — Moody’s Investors Service (“Moody’s”) has today downgraded Castellum AB’s (Castellum) long-term ratings to Baa3 from Baa2, all backed senior unsecured MTN ratings to Baa3 from Baa2, and its subordinate debt rating to Ba2 from Ba1. The outlook is stable.

Downgrades:

..Issuer: Castellum AB

…. Issuer Rating, Downgraded to Baa3 from Baa2

….Subordinate Regular Bond/Debenture, Downgraded to Ba2 from Ba1

….Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa3 from (P)Baa2

….Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 from Baa2

..Issuer: Castellum Helsinki Finance Holding ABP

….Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa3 from (P)Baa2

….Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 from Baa2

Outlook Actions:

..Issuer: Castellum AB

….Outlook, Remains Stable

RATINGS RATIONALE

The rating downgrade to Baa3 reflects Castellum’s significant exposure to more challenging capital market conditions with increasing interest rates and widening credit spreads, which will materially increase funding costs for Castellum. About half of the company’s interest rate is either maturing in the coming 12 months or based on floating rates and we expect materially higher interest costs to drive a weakening of the group’s fixed charge coverage ratio over the next 12-18 months to below 3.5x. During the first half of 2022, the company’s fixed charge cover already deteriorated from 4.6 times as of year end 2021 to 4.0 times as of June 2022. We expect the company to consider alternative and more cost-efficient funding sources such as secured bank lending, which may cause its unencumbered assets to decrease towards 50% but to remain appropriate for its Baa3 rating.

Over the coming quarters, we expect that higher interest rates will put moderate pressure on portfolio yields, putting market values at risk of decline at a time where the group’s gross debt/assets is already elevated at 45% and its net debt/EBITDA above 13x following the acquisition of Kungsleden AB in Q4 2021 as well as debt-funded share buybacks during Q1 2022. While the company’s financial policy of keeping its LTV below 45% remains unchanged, we caution that recent share buybacks as well as the continuous building of its stake in Entra raise some question marks as to the willingness of the new management team to protect the group’s balance sheet by building a buffer against potential value drops as capital market conditions continue to worsen.

Operating performance has remained strong during the first six months, supporting the stable outlook on the group’s rating. Like-for-like rental income rose by 4.4%, showing the group’s ability to raise its rents on the back of inflation-linked clauses in its rental contract. Occupancy stood at a strong 93.7% with positive net lettings of SEK 109 million and its net portfolio yield with 4.7% at the same level as in end of Q1 2022. This translates into estimated Moody’s adjusted effective leverage at about 45% and net debt/EBITDA of around 11x pro forma for the acquisition. The company’s short-term liquidity also remains adequate, bolstered by a strong level of available longer-term revolving credit facilities but we caution that its short-dated average debt maturity profile of just 3.6 years as of June 2022 exposes the group to currently weak capital market conditions.

RATING OUTLOOK

The stable outlook incorporates our expectation that value and earnings-based leverage metrics will hover around 45-47% and 13x and it reflects that we expect Castellum to conservatively maneuver in a deteriorating financial market environment on the back of higher interest rates and expected yield widening. The stable outlook also incorporates the expectation that Castellum’s business strategy, development and other investment activities remain commensurate with a conservative financial policy supporting its investment grade rating and business management.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to an upgrade

» Effective leverage towards 40%, as measured by Moody’s-adjusted gross debt/assets, together with a declining trend from net debt to EBITDA to 10x and financial policies that support the lower leverage

» Fixed charge coverage is above 4.5x on a sustained basis

» Increasing senior unsecured borrowing led to an increase of the pool of unencumbered assets to above 60% whilst at the same time further improves liquidity and the average length of its debt maturity profile

» reduce reliance on short-term funding and extend debt maturities

Factors that could lead to a downgrade

A rating downgrade could occur if:

» there is a deterioration in operating performance or if property market fundamentals weaken sharply

» effective leverage not maintained well below 50% or if EBITDA fixed-charge coverage is sustained below 3x

» Net debt/EBITDA above 13x

» Decreasing senior unsecured borrowing leading to a decrease of the pool of unencumbered assets to significantly towards 45%

» liquidity and access to capital remains sustainably weaken further or the debt maturity schedule is shortened

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/74168. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of  the guarantor entity.  Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Maria Gillholm
VP – Senior Credit Officer
Corporate Finance Group
Moody’s Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm, 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Anke Rindermann
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody’s Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm, 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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