MKB Fastighets AB 'AA/A-1+'And 'K-1' Ratings Affirmed; Outlook Stable

  • We expect the COVID-19 outbreak to have a limited impact on MKB Fastighets AB, with only minimal rental losses and no material effect on vacancy rates.
  • Following the renewed construction target of producing 2,250 apartments from 2020 and 2022, we forecast continued high capital expenditure but a limited build-up in debt.
  • We are affirming our 'AA/A-1+' and 'K-1' ratings on MKB.
  • The stable outlook reflects our view that MKB will maintain very low vacancy rates with only minimal rental losses.
STOCKHOLM (S&P Global Ratings) April 28, 2020-- S&P Global Ratings today affirmed its 'AA/A-1+' long- and short-term issuer credit ratings on Swedish public housing company MKB Fastighets AB (MKB), in the City of Malmö (AAA/Negative/A-1+). The outlook is stable. At the same time, we affirmed our 'K-1' short-term Nordic regional scale rating on MKB.
The affirmation reflects our view that MKB's financial position will remain robust despite the economic effects of COVID-19. We expect rent losses to be limited, and primarily related to the company's commercial properties, which constitute a minor share of the total property portfolio. Furthermore, because of strong internal cash flows, we forecast only limited debt build-up in 2020-2022, despite the ambitious investment plan of producing 2,250 apartments in the same period. We continue to view MKB's integration in Malmo's in-house bank as positive, meaning that the city treasury is now responsible for servicing the company's external debt obligations.
Our 'aa-' assessment of MKB's stand-alone credit profile (SACP) reflects the company's very strong enterprise profile, supported by a low industry risk, high asset quality, healthy economic fundamentals, and a strong position in Malmö's rental housing market. MKB's strong financial profile, which incorporates the company's conservative financial policies and low leverage, also supports the SACP. Furthermore, we include our positive view of MKB's integration within the owner's in-house bank in our assessment.
We consider MKB a government-related entity (GRE), and believe there is a high likelihood that the company would receive extraordinary government support if needed. This assessment is based on MKB's:
  • Important role for Malmö, which considers the company as a key contributor to the city's overall infrastructure and public policy, illustrated by the city's plan for MKB to markedly increase new construction; and
  • Very strong link with the city, which is actively involved in defining the company's strategy and has indicated its intention to maintain its 100% ownership of the company in the medium term. In our view, MKB's integration into Malmö's in-house bank also reinforces its link with the city.
In our view, MKB has a very strong enterprise profile, supported by a low industry risk and the company's very strong market position. MKB has about one-third of Malmö's rental housing market and 15% of the city's total housing market. Because of high demand for rental apartments in Malmö, we view the risk of vacancies as low; currently, they are an estimated 0.5%. Population growth is strong, at an average of 1.6% over the past five years, above the national average of 1.2%. We expect this trend to continue in the coming years, supporting Malmö's property market, which, in line with those in other Swedish cities, has reported a steady rise in market valuations for several years.
The average age of MKB's property portfolio is 44 years, a large share of which was constructed before 1975. In our view, management has been proactive in upholding the maintenance of its property portfolio to ensure high living standards, resulting in relatively high per-square-meter expenditures over the past few years.
MKB's strong financial profile is attributable to stable operating cash flows, a robust balance sheet, and conservative financial policies. In 2019, MKB finalized the construction of 765 housing units, the fifth consecutive year in which the company managed to build above 500 apartments. Due to a continued housing shortage in the city of Malmö, management is determined to work toward the ambitious target for new construction in the coming years. The city council recently renewed the target for MKB of providing 2,250 new apartments in 2020-2022, but management believes it will be challenging to reach the goal, primarily due to external factors.
We project capital expenditure to remain high through 2022--mainly related to new construction--averaging Swedish krona (SEK) 1.2 billion (about €110 million). However, in light of the COVID-19 outbreak, we believe there could be additional delays in MKB's investment plan. Therefore, we have assumed a somewhat lower completion rate in 2020, resulting in lower borrowing needs. In 2020-2022, we expect the debt accumulation to average around SEK670 million in net new loans. We forecast the five-year average debt-to-EBITDA ratio will increase marginally to 13.27x from 12.70x, and the EBITDA interest coverage to remain very strong at 6.62x.
We expect MKB's five-year average EBITDA to revenue will remain above 30%, supported by strong local economic fundamentals in Malmö. In 2020, we project somewhat lower revenue growth in light of the COVID-19 spread, which could lead to higher rent losses, especially related to the company's commercial properties. However, we still forecast a higher EBITDA-margin compared to 2019, in which the performance metrics were pressured by increased expenditures, mainly related to maintenance. As MKB enters a consolidation phase, we expect expenditure growth to decrease somewhat, leading to improved EBITDA margins beyond 2020.
MKB is now fully integrated into Malmö's in-house bank, meaning that the city has assumed full responsibility for the company's financing activities. MKB no longer has any direct contact with the capital markets since the city council has prohibited the company from tapping the markets independently. The financial relationship between MKB and Malmö is regulated by contracts, including an agreement stipulating that the company will receive a notice 12 months in advance if the city were to withdraw from its financial commitment. In our view, this tight relationship distinguishes MKB from its peers, both domestic and international, and adds to the company's creditworthiness.
We continue to assess MKB's liquidity position as adequate, with a sources-to-uses ratio of 1.22x, marginally improved from 1.18x in our most recent review. Following its integration in Malmö's in-house bank, the company no longer holds its own external back-up facilities. In addition, the risks related to the financing also rest with the owner. We consider the transfer of risk as ongoing financial support from the owner and therefore include in our estimate of MKB's liquidity sources a SEK 3.67 billion cash injection from the city. This equals MKB's estimated capital expenditure for the coming 12 months, in addition to maturing debt and interests.
Liquidity sources in the 12 months starting April 2019 include:
  • Cash flow from operations of SEK765 million
  • SEK100 million of undrawn committed facilities placed in the in-house bank
  • SEK3.67 billion of cash injections from the city
Liquidity uses over the same period include:
  • SEK1.15 billion of capital expenditure
  • SEK2.52 billion of maturing debt and interest
  • SEK34 million of estimated dividends
MKB's financial relationship with Malmö is formalized in legal documents stating that the city will be responsible for supplying the company with funding up to the limit decided by the municipal council. However, MKB has autonomy to choose its financing within this limit. The limit was recently increased to SEK15 billion from SEK12 billion, in preparation for the upcoming investment plan in 2020-2022. We expect that additional increases to the funding limit would be a formality, because the city will continue to provide funding for the construction it mandates the company to produce.
The stable outlook reflects our expectation that MKB will maintain its stable financial performance, despite the outbreak of COVID-19. Although we anticipate high capital expenditure throughout the forecast period, we expect the company to continue generating strong cash flow to contain the debt accumulation. Furthermore, we expect the relationship between MKB and the city will remain stable, with no changes to the ownership or support structure.
The ratings could come under pressure if Malmö terminates the financial relationship with MKB and the company's integration in the city's in-house bank. The ratings could also be constrained if financial performance would deteriorate, caused by, for instance, higher rent losses than anticipated due to the COVID-19 outbreak, also leading to a higher debt burden.

We could consider raising the ratings if MKB improved operating efficiency, resulting in significantly stronger EBITDA margins; and lowered its debt burden, for instance, through substantial asset sales.
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