Fastighets AB Balder (publ) (BALDB) Earnings Call Transcript & Summary

Good morning, and welcome to the Update Call Balder. My name is Charlie, and I'll be coordinating the call today. [Operator Instructions] Following the presentation, our Q&A session will be open until 8:45. At which point, we will close the call. I'll now hand over to your host, Ewa Wassberg, Head of Finance, to begin. Ewa, please go ahead.

Hello, and welcome to our call about the press release as of yesterday regarding the revise from S&P and the rating outlook from stable to negative by confirming our BBB rating. I think I will start with some key figures from Q3. And as you're well aware, our equity assets is in line with our long-term goal of 40%, it's 40.4% as of Q3. Our net debt-to-EBITDA is plus 13.5% Q-on-Q, which we expect to improve further in the coming years due to lower investments in combination with cash flow from completed projects. Our ICR is 5.2 combined to our long-term target of 2.0. That said, we believe all our credit metrics are performing very well, and we are -- that we manage the refinancing with a good headroom in our metrics. Erik, that's from me. Over to you, Erik.

Yes, and also it's worth to mention, this is looking at S&P, what their conclusions are. They say that even if property values fall according to their forecast, we will still have a margin on debt-to-EBITDA and ICR and so on. So they are most worried about liquidity in this case. And the refinancing and the figures from Q3 is actually strong as well and with some headrooms to their requirements, but they are maybe a bit cautious about the future. And from our side, of course, everybody can be a bit worried these times, but we feel that all the discussions with banks and so on continues very good. So I think we're a bit more optimistic. But I think the important thing is that on the metrics, even with the S&P's a bit negative forecast, it's well in line with the ratings. So it is liquidity, and we are refinancing things and even booked some in advance. So we just have to keep up the good work there. And this is an outlook for, I think, 1 to 3 years ahead. So yes, we just have to continue to do the best we can, and we think refinancing right now at least is going very well.

Yes. And with the discussions with S&P, they are certain that we will not break any thresholds, albeit it's just a way of highlighting increased risk and certain uncertainty regarding the refinancing environment. I think that's important to highlight.

And I think they see a bigger risk in bank refinancing than maybe we do or, I don't know, people in general in the Nordic markets now. But I mean, everyone can have different opinions about everything, of course. But we thought it was, anyway, good to have a call to answer any question for specifics or something we can discuss. So I appreciate that a lot of people are taking the time to dial in, and maybe we can see if there are any questions.

[Operator Instructions] Our first question comes from Simen Mortensen of DNB.

This is Simen from DNB. I have a few questions. First of all, with this negative outlook, will you be considering steps to improve the balance sheet, for instance, asset sales and similar transactions to improve the balance sheet?

If you look at the S&P statements, they are -- actually, think the balance sheet is okay, Simen. They are looking at refinancing and liquidity. Of course, we can sell assets anyway, but the metrics even going forward are okay, if you look at debt-to-EBITDA ICR and if you look at debt to debt class equity. So I will say if refinancing continues to go well as it does, then from an S&P standpoint, we don't need to do anything. But of course, we can -- if we think it could be, in the total picture, to sell something that can be also can be done.

Second question will be already in March in Q2 next year, you have some hybrid instruments maturing. The risk seems, clear also intact given the liquidity situation. How are you plans to do the call on these? And how do you address that if they lose or not or keep the 50-50 split used by rating agencies in the handling of these hybrid instruments? How do you address these? And what are your thoughts and plans for refinancing these hybrid instruments?

As you know, S&P hybrids is a bit -- how should I call it, troubled to talk about because if we communicate exactly what we will do, then S&P can take that into account the same day. So S&P hybrid is very difficult for all of the companies having then to say something at once. So I think, as you all know, we have to communicate at one time to everyone and not have information selectively about that. I think it's an unlucky situation that we actually can't do much about it, these S&P rates.

Okay. And my last question will go to in terms of securing financing nationally backed, that seems to be a viable option. What is the current secured or pledged debt ratio? And how much refinancing can you still do unpledged as secured debt? And how much will that potentially cover? How much time will that give you on the maturities coming up based on your handling quite a lot of maturities of bank that's already covering coming up for refinancing next year?

You can see, if you look at Q3, there's a very big headroom from where we are then and you look at sort of too high. So that level is still below. Maybe Ewa has a figure, but what we do is now is that we are taking on...

Yes. About -- sorry, it's about 30% secured as of Q3. And I guess your question is if we replace 23 and 24 with secured bank financing, it will rise from 30 to approximately 40, well in line...

[indiscernible] and how big part of the secured...

How much headroom you have left?

Yes. It's a big headwind. I think we are right now...

Yes, it's a very big headroom.

We may think. So our idea is basically that we have credit lines and bank facilities. And if we use them, we can manage bonds for '23, '24. And we don't have to do any acquisitions if we don't want to. And then basically, we can save for '25 maturities and then maybe '26, we will have to look at something in that scenario.

Our next question comes from Erik Granström of Carnegie.

I have 2 questions. The first one, regarding your liquidity position. How have you handled it since the end of Q3 in terms of buying back bonds? You mentioned that in the press release. Could you give us some more on what you have done during Q4 and what you feel in terms of your liquidity position at this point?

We bought -- we tried to buy back all the '23 bonds FX denominated. And so we offered to buy 100%. We got, I think, maybe 65% or something like that, Ewa?

Yes.

But it was still pretty good to get them in advance. Since we have the liquidity, we thought it was good to give the investors an alternative at least. And then this is an ongoing thing to actually turn, in some cases, commitment to action to loans. So then later on, a remaining '23 and after that, '24 bonds as well. So this is an ongoing process that is going good, I would say. And for all the banks, I think this is a good way to do it right now and as we feel very supportive, and it makes sense for everybody actually.

And my second question is, when you do have discussions with the banking system regarding secured debt, how do you interpret their pricing at this point if you were to compare it to, say, in spring of '22? Has this changed materially? And if so, what kind of on average would you say margins are in the banking system today?

I would say it's a bit more expensive, but it's not that dramatic, actually. It's a bit more expensive. But -- and margins, you have quite a range actually depending on if it's resi or commercial and if it's how long credit duration you have. So say you have a span everywhere from maybe 1 -- in margin then, maybe 1.25 up to perhaps 2 or 1.75 somewhere around that. That is actually different case by case in that area, I would say.

Our next question comes from Clark McPherson of Clearance Capital.

Just a quick one on the -- yes, just unsolicited rating from Moody's. Is there anything you can do about that in terms of possibly getting that removed?

I don't know actually. It's a very good question, and we get a lot of questions from investors that really want the same thing. But the big -- I don't really know how to do it, I mean we feel that the investor community wants the same thing. But of course, we have no actual way of stopping someone if they want to. I mean, now everyone thinks this is a bit strange, and many investors are actually quite upset with this, but I don't know if we have any tools to change it.

Right. And just coming back to the hybrids. Should we -- sort of from your previous comments, should we think that all options are on the table in terms of -- well, it's possible that you could consider extending beyond the core dates. I mean, that would obviously help address one of the concerns highlighted in the S&P report, which is the liquidity.

I mean, obviously, we can consider anything from the time basically that -- in this case, I think it's difficult for us to communicate without doing it at the same time to everyone. No matter what goals alternative we'll go, I think still we should communicate the same inflammation at the same time basically.

No, I understand. I mean, did you actually have a discussion with S&P before the release of this report? And if so, was the refinancing of the hybrid part of that discussion? I mean, without going into the option.

No, hybrid specifically was not the discussion actually. It's not that big part of the total. So if you look at it and the possible alternatives, it will not make a big difference. So the discussion was more that our liquidity position is very good. I think it's never been better actually. But it's more that they think what might happen in 1 or 2 years. And of course, it's very hard for me to prove what will happen in 2 years. I think it's quite impossible. And I think the difference between us is that they feel that bank refinancing would be more complicated than we think. And I mean, time will tell, but looking back, I think in general, Nordic banks are relationship-driven. And I don't think I heard actually a customer that sort of loses their financing if everything, else is okay. But I mean, it's not exactly wrong. This is a different way of looking at it. So that was the discussion. And yes, all the other metrics, even with the core cost of falling prices and so on is okay if you look 1, 3 years ahead. Anyway at least we have good earnings and we don't need to invest, if I don't want to. So that's the difference, I think what if you can't refinance bank debt. Okay. We just have to keep on working with that and inform them. Yes.

Okay. That's clear. Thank you very much for the answers and again, for hosting the call.

Our next question comes from Ludwick [ Capelin ] of Nordea.

So 2 questions from my side. I wonder, because in the press release yesterday, you said that you will take the steps necessary essentially to defend your BBB rating as it stands, and that you are confident that you will be able to do that. Could you please give us some examples of what such steps could be?

That is basically to continue to refinance it to keep up the metrics that they want to have. We already have them, but we have to continue that work. If we just do nothing, then time will sort of be against us because everything matures.

Absolutely. And your options there? What types of financing are you targeting primarily in this type of market?

What we are doing now is that we are taking up more bank financing. And that works good, we would say. And if we do that according to plan, we handle all the bonds. And we don't think that the refinancing bank debt is a problem. But there, you can have different views. I mean everybody can think differently about that.

Absolutely. I understand. And with regards to the credit lines that you have available as of now, can you use them for whatever purpose you like? Or are there any restrictions for what you can use it for?

Normally, we can use them either way, but we have no use for it, unless it is to basically clear and go from bond and using loans instead, because the running business gives excess cash all the time. So when we are taking up loan, it is just to refinance bond market. And we also like that if we buy back bonds, then we don't need that much liquidity since S&P looks 1 year ahead and then we should cover it with a margin. So if we pay back, let's say, SEK 5 billion, then we actually saved SEK 6 billion in the S&P, how they count. So I guess maybe you know it already but -- so that is the system that -- that's how they measure it.

[Operator Instructions] Our next question comes from Louis Landeman of Danske Bank.

Yes, I'm also trying to understand the reason for this rating action. And as you say, it seems to be more on liquidity concerns than leverage, which in a way is understandable, but perhaps slightly surprising as well given that I have certain criteria that you have to fulfill and you're currently fulfilling those. But of course, if you extend from 12 to 24 months, I can see that there is the risk. But the question will be only comes back to the bank financing. It's a part the question of refinancing existing bank financing, as I understand it. And the second one would be that is it your impression that you need to sort of achieve additional bank financing to maintain a stable credit profile? And if so, do you have like a target for how much additional bank financing you would need? And also if you could comment on the general appetite among Nordic and/or other banks for additional [indiscernible].

You're absolutely right. This is just about financing, for all the other metrics are well in line actually. And even if they look forward, I think it still will be. So they are just concerned about liquidity. And the situation right now is very good that they also say that they say we don't know what happens in 1 or 2 years. And of course, nobody knows. So it's important to have that in mind. And what we do now is that we take up more bank financing and reduce bond financing for the time being. And what we think is that it will be a strategy to secure all the bonds '23, '24. You know that we have the possibility to sort of go from bonds to bank for those maturities. And after that, we can actually pay '25 without borrowing money because we can pay it with our earnings. So then we are at '26, but we maybe have to do something or continue just to save money and pay even then. So that is our more long-term strategy that we are working on now. So we think we feel a very strong support from all the banks. But of course, it's hard to prove that, how is the situation 2 years from now. I think it's difficult to have -- also if we just continue with it you will also see that this is working quite well. They are, in general, more afraid of bank financing than we are. I think it counts down, I would say.

What I find there, that's what I also find quite interesting. But yes, very good thanks for all the labor. But it also seems, as a follow-up, I mean that you have, in a way, a very large capacity to add on additional secured debt rating, right?

Yes, yes, yes, huge capacity, absolutely. Absolutely.

So as long as you can assure an additional bank financing, basically, this should be a manageable situation, basically.

Yes, yes. Absolutely.

Our next question comes from Markus Henriksson of ABG Sundal Collier.

Going back to the last question and maybe if we can also dress it a bit in numbers. First off, when you have repurchased the bonds now for '23, how much bonds are outstanding here for '23 and '24 out of outstanding debt?

Swedish, we got back 1.3 something out of 2.5. So it's like a 900 left in the SEC market. And in '24, we have 4.5 billion in the tech market. And then we have in Balder EUR 500 in '23, nothing in '24, and we have the hybrid '23 that we will do something with that we have to communicate another time. And then our Finnish subsidiary have EUR 300, 2 years F '23, '24, but they actually have facilities to cover that, but they might do some other solution as well. So it is quite manageable. But on the other hand, I think S&P likes to follow it and then we actually do it, we -- yes. Then they see that we do it. So and then '25 is, I think, EUR 500. And if we sort of secure '23, '24, then we can just save on the repayment without borrowing.

Very clear. And then also then compared to the secured financing that was also in the last question to address that in raw numbers. You're currently at 16% secured versus the total balance sheet. How much have you roughed in and compare that to the bond maturities that you just mentioned?

I don't remember that the amount is so big. So if we go to the maximum, I don't know, I think it covers -- I don't know, a couple of years more, maybe we are around through '28 or something, anyway we are far away then.

But then you want to keep some headroom? You don't want to be too close either to that threshold like...

No, no, no. But I mean if you look ahead 3, 4, 5 years, it will not be too much. And on top of that, we also have a run cash flow and earnings, and also I think that threshold is not -- that is not a risk for many years.

Very clear. Then do you know what type of inflation assumption S&P have in its rental income estimate for '23? And do you know if they include any project gains or only the top line effect from projects, as they mentioned.

Only top line, not project gains. And it was [indiscernible]

And the inflation assumptions, we got a new figure yesterday.

It is in the release. Do you know it, Ewa? Do you have it in your book?

I think the indexation in Sweden and Finland is about 7%, [ September 3 ]. But you're right, it's -- all the assumptions is in the release.

Our next question comes from [ Adrian Forked ] of Deutsche Bank.

Yes. So basically, I had a couple of questions. The first one is on your financial policy. We've seen some of your peers at [ Kevan ] some Castellum recently revising slightly more conservatively their LTV and ICR metrics. So I was wondering if it was something you could consider in the near future in order to please rating agencies.

Yes, very good question, and we are actually thinking about that, but that is also a question for the Board, obviously, but we are looking at it. And I think we should add that will be decided when we look at it, but I think we don't have any target for net debt-to-EBITDA, and that wasn't really a big thing when interest rates were supposed to be 0 forever. But now since we have interest rates, I think that is a quite interesting metric to look at as well. So of course, we can look at the one we have, but maybe to add even better.

Okay. And the second one is, I mean, we've seen that you've done some tenders on, let's say, the low sorry, the short-dated SEK bonds as well as the hybrids during the summer. So I was wondering if you could consider as well some tenders on, let's say, the longer dated senior bonds, which trade at a low cash price, which could allow you to maybe improve some of the metrics as well.

Yes, that's a very interesting idea actually. So I agree with you, it's very interesting to look at that. You are 100% right.

[Operator Instructions] Our next question comes from [ Sylvia Durante ] of NN Group.

I would like to get back to the hybrid again. The 2 rating methodologies that you have seem to incentivize different actions for the hybrid next year. So I appreciate you can't really indicate your preferred action. But in general, is it fair to assume you would greater focus on the one rating that you have, which is solicited mostly? Or would you look at both?

I didn't quite follow you. Could you say one time again?

Yes, sure. I was talking about the hybrid and the fact that Moody's and S&P have -- let's say 2 different methodologies when looking at this.

Yes.

So I appreciate you cannot really say much about what you're going to do. But in general, would you -- is it fair to assume that you will focus on S&P methodology mostly? Or would you look at both next year?

Okay. Now I understand. Yes, I agree with you, I think in the case of hybrid, I think Moody's approach is more rational since they look at every hybrid sort of individually. So if you have a hybrid and buy it back then they sort of exclude that one, that doesn't affect the other one. So I think they have a better approach on hybrid's Moody's. But then I don't know if you can have a separate rating on hybrid for -- we have to look into that, actually. Do you know if you can have a rating just for the hybrids on Moody's, but not on the rest, do you know?

No, I don't think so. But yes, it was -- right now, you have both of them, right? So...

No, we don't, sadly with this day rate. There is no day rate, at least not on our behalf. So they do it on their own but not on our behalf.

So when you will decide what to do, you will mainly focus on the one you decided to have, so S&P methodologies? That will be the main driver?

Of course. Of course. That's our solicited rating.

Now we -- right there are now [indiscernible].

Moody is unsolicited.

Sorry, what did you -- I didn't hear.

The Moody's rating is unsolicited. So S&P is the rating agency, we use as our solicited rating so of course, we will focus on S&P.

Okay. Okay. That's clear. Thank you very much for the clarification. I had other questions, but they were already answered. Thank you.

Our next question comes from [ Andrew Ling ] of BlackRock.

I appreciate the communication so soon after the report came out. Just noting your points on increasing secured debt. Obviously, the margins and base rates are increasing and have increased relative to your current cost of capital. So where do you sort of expect your interest coverage to get to if you assume you refi everything up to 24 with secured bank debt?

Hi, Andrew, finally.

I know. We'll have to do a separate call later, but [indiscernible]

Well, we've been try to call each other 10x, but nice to hear your voice. I don't think it will have a huge impact with 70%-ish of the debt is maturing later. So exactly what the ICR will be also depends on rental income, but there will be a big headroom under all circumstances to what we need to have. How big, I don't know exactly, but it is way over what we need to have, if you're thinking about the rating.

Yes. The S&P currently has a secured debt trigger in your downgrade trigger.

What did you say that had a secured debt?

Do they -- they sometimes have a downgrade trigger that limits the amount of secured debt that you can take on. And I'm just wondering if you're sure that you have one in your...

Sure. But it is much higher than we are now. I don't remember the exact figure, but the headroom is so big. So I mean, most likely, we will never reach that level. If so, it's many, many years from now in that case. If we just continue to go to 100% bank debt and never have bonds anymore. But I still think that actually that is possible without reaching that trigger.

Okay. And I know you're not communicating too much on the hybrids, but I just had a technical question. You did the tender for 10% last year. Does that reset each year?

No. They measure it on a 365-day rolling basis. So you can't use calendar year. Yes, they even told me that higher. If you can't do it in December, then -- and then in January, for 365 days. And then you can do another 10%, again, if you want to.

Our next question comes from Neeraj Kumar of Barclays.

I'm sorry, I joined a bit late, so I'm not sure if this was answered already, but I'll still ask the question. So regarding hybrid, I can see there are a couple of questions already. So what I want to understand is that how you're thinking about it? Because like in terms of what your options are and how likely you are to go ahead with those options. I mean, there are restrictions from S&P on what you can say, but how you are thinking about it, like in terms of letting it extend or like sort of refying it with equity days? Or like what are your thoughts on like what sort of new coupons are you willing to accept in terms of if you have to refi?

I think we have to communicate it to everyone at the same time. Basically, we can't really say what we're going to do in selectively. So -- and that is very unfortunate. I would like to be able to elaborate more on this but it's not good if we're looking at what S&P thinks about it. So I'm a bit handcuffed there unfortunately.

I mean -- yes, I get it. I mean, the question is in context of like the near-term refinancing in terms of like whether you plan to prioritize other refinancing than the refinancing of hybrids?

I think that's the same question. And if I answer that, then I actually say what I will do. You should be a journalist, actually.

Sorry. No. Apologies. The credit rating [indiscernible] idea. Yes, I think that's all from my side.

Our next question comes from [ Maggie Chang ] of CA Industry.

Can you give us some color on the valuations? Because I think the market, it's at around 10% to 15% decline. I mean, S&P expects 5% decline in 2023. If you think 5% is fair, does that mean that there will be more decline like 10% in 2024? Just a rough estimations.

Yes, I understand the question, but we don't really make forecast on valuation. We do it every quarter, and we get it from an external valuator. So we never make a forecast for value till later on, so -- and actually, I feel that I really don't know. So it's hard to tell.

Okay. Okay. Understood. Yes, and also a question about secured debt to total debt that could trigger a downgrade is 50%.

50%, okay.

Yes. Yes. Now we are at 16%. S&P, we got a 16.4%.

Yes, that's true.

This is all we have time for in terms of questions, so I'll hand back to Johan for any closing remarks.

Thank you, and thanks, Ewa and Erik, for the presentation and everyone for listening to the questions. The time is up. And if there are any follow-up questions, you can send them directly to Erik or Ewa, and they will answer you directly. So thanks again and have a great day, everyone.

Thank you. Thanks. Bye-bye.

Thank you. Bye.

Ladies and gentlemen, this concludes today's call. You may now disconnect your lines.