Fitch Ratings has affirmed Swedish investment company Investment AB Latour's Long-Term Issuer Default Rating (IDR) at 'A'.

The Outlook is Stable.

The rating reflects a number of factors, the most important of which is the quality of the company's wholly owned operations as well as its income stream from equity investments, both of which have remained resilient through the pandemic and are expected to remain strong.

Other key factors supporting the rating include Latour's long-term commitment to its diversified portfolio, the liquid nature of its assets, the stable nature of the dividend stream and a conservative capital structure. The company also has good liquidity and strong free cash flow.

The Stable Outlook reflects our view that Latour will maintain its prudent financial policy and that the loan-to-value ratio (LTV) relating to its equity investment portfolio will remain well below 25% over the coming three years.

Key Rating Drivers

Equity Investments Underpin Rating: The key driver of Latour's IDR is the quality of its income stream, both from its fully owned subsidiaries and its equity investments. Latour's rating is supported by the Fitch-calculated blended income stream rating for the company ('BBB'), which receives a two-notch uplift for supplemental rating factors to reflect the fact that Latour's credit profile is consistent with the 'A' rating category.

The supplemental rating factors relate to the quality and stability of the dividend stream, the LTV ratio, asset liquidity and the company's investment strategy and investment record.

Diversification Uplift: The rating further benefits from a one-notch uplift for the diversification of the equity investment portfolio, which has only limited concentration. While several holdings are exposed to the manufacturing and construction industries, we view the diversification within these companies, both by end-market and geographical, as adequate. The majority of Latour's holdings are international companies, some with a global presence, while others operate more regionally in Nordic countries.

Assa Abloy Concentration: Fitch views the number of investments in Latour's portfolio as sufficient for the rating, but there is some income concentration risk related to the largest holding, Assa Abloy AB. We expect Assa Abloy to provide around a third of Latour's total dividend stream from equity investments in 2022 and this portion is likely to remain stable in the medium term.

Solid Capital Structure: Latour's loan-to-value (LTV) ratio increased to 17% at end-3Q22, up from about 11% at end-2021 as a result of the significant decline in the value of its equity investment portfolio, which broadly mirrored the wider Stockholm Stock Exchange's Total Return Index (SIXRX) decline of around 30% in the first nine months of 2022. Nevertheless, the ratio remains strong and well below the 25% threshold for a single 'A' rating according to Fitch's 'Investment Holding Company Rating Criteria'.

The relatively minor deterioration in the ratio also reflects the moderate debt levels at Latour and the conservative funding strategy of the group. The rating is underpinned by our expectation that the company will maintain a LTV of well under 25% through the medium term.

Moderate Acquisition Pace to Remain: The outlay on new acquisitions has been lower than usual so far this year (expected to be under SEK2 billion on a net basis for the full year) because of market volatility. Fitch expects the company to maintain this moderate level in the short term. Depending on size, we expect future acquisitions to be partly debt financed, but forecast Latour's financial profile to remain solid, supported by its prudent investment policy. Latour has historically had a high acquisition frequency within its wholly-owned operations, coupled with organically driven growth.

Dividend Income to Bounce Back: We expect 2022 dividend income from equity investments to be about 30% higher than the SEK1 billion received in 2021, as companies continue their post-pandemic recovery. From 2023, we expect a broadly stable or mildly increasing level of dividends received, with an annual increase of no more than in the low- to mid-single digit range.

Cash Deployment to Remain Conservative. Latour has a prudent financial policy, and we expect its shareholder distribution levels to remain conservative in the short to medium term in order to support small bolt-on acquisitions out of free cash flow generation. We expect 2022's dividend payment to be about SEK2.1 billion and rise gradually in line with the underlying profitability of the group. We also expect capex to remain at about 2% in 2022 and remain at that level in the medium term.

Long-Term Investment Horizon: Latour is a mixed investment holding company with six wholly-owned subsidiaries and 10 investment holdings, all of which are listed, thereby supporting the company's solid liquidity. Fitch believes that Latour's long-term commitment to its investments and the medium to strong ability to influence the operations, either through 100% ownership or as principal owner, create stability and value-adding effects.

Derivation Summary

Latour's rating is equal to that of Loews Corporation (A/Stable) and two notches above that of Criteria Caixa S.A., Unipersonal (BBB+/Stable). It is well above Turkish investment holding company Ordu Yardimlasma Kurumu (Oyak; B/Negative), whose rating is driven to a large degree by the Turkey country ceiling.

Caixa has a blended income stream rating of 'BBB-', one notch below Latour's, and benefits from a two-notch uplift from supplementary factors based on five of nine factors assessed in the 'A' category. Despite having a smaller number of equity investments (five) than Latour, Loews benefits from a higher blended income stream rating of 'BBB+' and a two-notch uplift for supplementary rating factors, of which eight out of nine are scored in the 'A' category according to Fitch's criteria.

Oyak is one of Turkey's largest investment holding companies with solid market positions in steel, automotive and cement markets that result in a blended income stream rating of 'B+'. Oyak has less end-market diversification that Caixa and high exposure to Turkey (B/Negative), which is partially mitigated by its more conservative leverage metrics and LTV compared with Caixa.

Key Assumptions

Revenue from wholly-owned companies to grow around 15% in 2022 based on acquisitions and strong performance in Bemsiq and Caljan. Mid- to high-single digit growth 2023-2026 based on recent acquisitions and price increases.

Strengthened EBITDA to 16.3% in 2022 before a small decline over the next two years due to inflationary pressures before increasing back to 2022 level by 2026.

Dividends from equity holdings to recover to around SEK1,325 million in 2022 and gradually increase to SEK1,397 million in 2026 based on our expected improvement of profit levels.

Full redistribution of dividends received from partly- and wholly-owned investments to Latour's shareholders 2023-2026.

Capex of 1.8% of revenue in 2022 increasing to 1.9% of revenue for 2023-2026.

Acquisitions of SEK1.5 billion in 2022-2023, increasing to SEK 2 billion annually in 2024-2026.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

Improvements in the underlying credit quality of equity holdings resulting in an upgrade of Latour's Fitch-calculated blended income stream rating

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

Deterioration in the underlying credit quality of equity holdings or wholly-owned holdings resulting in a downgrade of Latour's Fitch-calculated blended income stream rating

Material decline in one or more supplemental rating factors leading to a reduction in the current notching uplift

Change in investment or financial policy at the holding company level resulting in acquisitions or shareholder-friendly actions inconsistent with the current rating profile

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Solid Liquidity: At end-3Q22, Latour's reported cash position was SEK1.5 billion, very similar to end-2021. Liquidity is supported by undrawn revolving credit facilities of SEK6 billion with maturities in 2023 and 2024 and projected positive free cash flow of around SEK470 million in 2022. Present liquidity level is sufficient to cover upcoming debt maturities until 2024. Around 60% of Latour's gross asset value at end-3Q22 comprised listed assets with frequently traded shares, which represent a readily-available source of liquidity, even under periods of pressured equity markets, although with a negative correction in asset values.

Diversified Debt Structure: Latour's funding consists mainly of bonds issued on the Swedish market with an outstanding value of SEK8.75 billion at end-3Q22. The maturities run until 2Q27 and are well diversified.

Issuer Profile

Investment AB Latour is a Sweden-based mixed investment holding company consisting primarily of wholly-owned industrial operations and an investment portfolio of listed holdings in which Latour is the principal owner or one of the principal owners. The investment portfolio consists of 10 holdings with a market value of SEK61 billion at end- September 2022 (end-Sept 2021: SEK83 billion).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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