OREANDA-NEWS. S&P Global Ratings said today that it has affirmed its 'AA+' long-term and 'A-1+' short-term issuer credit ratings on Swedish public property provider Specialfastigheter Sverige AB. Theoutlook is stable.

At the same time, we affirmed our 'K-1' short-term Nordic regional scale rating on the company.

The ratings reflect the combination of our assessment of Specialfastigheter's 'aa-' stand-alone credit profile (SACP) and our view of a very high likelihoodthat the company's owner, the Kingdom of Sweden (unsolicited; AAA/Stable/A-1+), would provide timely and sufficient extraordinary support tothe company in the event of financial distress.

In accordance with our criteria for government-related entities (GREs), our view of a very high likelihood of extraordinary government support is based onour assessment of Specialfastigheter's:

Very important role in Sweden's economy, from a unique position as a provider of essential, state-funded properties built to maintain public safety and national security. Specialfastigheter operates as an independent entity and plays a very important role in meeting political objectives and implementing key national policy; and

Very strong link with the Swedish government, which fully owns Specialfastigheter, is actively involved in defining the company's strategy, appoints its board, and has a long-term commitment to the company. In addition, the Swedish government has a track record of supporting the GRE sector, and any unremedied financial distress at the company would pose significant reputation risk for the government.

We assess Specialfastigheter's enterprise risk and financial risk profiles, the components of its SACP, by benchmarking against factors described in our criteria for rating public housing providers.

We believe that Specialfastigheter's tenants base, consisting almost exclusively of central government agencies, is a key support to its very strong enterprise risk profile. Specialfastigheter owns and manages the majority of Sweden's prisons and several defense and police authority properties. All its tenants are state agencies, most of which provide servicesdeemed essential to Sweden's public safety and national security. The company offers highly specialized and tailor-made premises and benefits from long-lease contracts, which guarantee long-term relationships with tenants andenables stable revenue streams. In November 2016, the average remaining term of Specialfastigheter's lease contract portfolio was 14.5 years (15.1 years inNovember 2015). The terms and conditions do not permit early termination of a contract without full compensation from the tenant for the remainder of the lease. Moreover, all lease contracts contain index clauses offsetting a large part of the risk associated with expenditure increases. Furthermore, long-lease contracts with government agencies ensure minimal vacancies (currently 1.4%) and further support the company's very strong enterprise riskprofile.

Specialfastigheter enjoys a very strong financial risk profile, underpinned bystable and predictable cash flows from its operations. We estimate operating cash flows will remain robust in 2016 with an EBITDA margin, including capitalized maintenance, of about 64%.

Following Specialfastigheter's predominately debt-financed dividend payments in 2015 of Swedish krona (SEK) 929 million (€95.5 million) and SEK2.07 billionin repayment of share capital to the government, the company's debt position appears to have stabilized in 2016. Modest capital expenditures in 2013-2016, combined with sustained robust profitability, have helped limit the company's financing needs. However, its debt to debt and equity has risen and will likely stand at 64% at year-end 2016 compared with 52% in 2014. The increase stems from the debt-financed payments to the owner, which were intended to bring the company's equity to assets ratio (solvency ratio) in line with the owner's target of 25%-35% of total assets. We estimate that this ratio is now at about 30%. We foresee a similar stabilization of Specialfastigheter's debt-to-EBIDTA ratio, which we project will be at about 12x by 2018, compared with 8x in 2014 before the debt-financed payments to its owner.

Despite this increase in debt, we expect EBITDA interest coverage will remain strong, albeit volatile. Even though we expect Specialfastigheter will benefitfrom a continued low-interest-rate environment, we anticipate that a peak in maintenance spending next year will weigh temporarily on its EBITDA margin, reducing it by about 10 percentage points in 2017 compared with 2016. As such, we expect the ratio will decrease to a still comfortable level of about 4x in 2017 before rebounding to 4.4x in 2018. We estimate the ratio at 4.8x in 2016,down from the very strong level of 6.1x in 2015 when the debt hike had not yetaffected the full-year interest payments. We forecast that Specialfastigheter's profitability and interest coverage levels will remain strong overall, despite the temporary decline in 2017.

The stable outlook reflects our expectation that over the next two years Specialfastigheter's very strong enterprise risk profile will support sustained strong EBITDA margins, ensuring robust debt sustainability and adequate internal liquidity, despite an uptick in debt over the past two years.

The ratings could come under pressure if the company's link to, or role for, the government were to decline; for example if its owner were to request Specialfastigheter to expand into business segments with lower public policy importance or announce a privatization of the company, which we consider unlikely. We could also take a negative rating action if the company's SACP were to weaken, for example, due to deterioration of its liquidity position stemming from looser financial risk management.

We would consider a positive rating action if, in our view, the company's linkto, or role for, the government were to improve, for example if formal guarantee commitments were extended to the company. Ratings upside could also follow a strengthening of the SACP, for example, thanks to a better liquidity position, such as following a marked reduction of short-term debt that strengthened the resilience of the company's balance sheet.