TEXT-S&P summary: Investor AB

Thu Oct 4, 2012 9:00am EDT

(The following statement was released by the rating agency)

Oct 04 -

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Summary analysis -- Investor AB ----------------------------------- 04-Oct-2012

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CREDIT RATING: AA-/Stable/A-1+ Country: Sweden

Primary SIC: Holding

companies, nec

Mult. CUSIP6: 46145A

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Credit Rating History:

Local currency Foreign currency

16-Dec-1997 AA-/A-1+ AA-/A-1+

24-Jan-1994 A/A-1 A/A-1

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Rationale

The ratings on Sweden-based investment holding company Investor AB (Investor) reflect Standard & Poor's Rating Services' view of its "strong" business risk profile and "minimal" financial risk profile, as our criteria define the terms.

A key support for our ratings is management's conservative financial policy, which has translated into a robust capital structure with consistently low loan-to-value (LTV) and above-average liquidity, given the company's long-dated debt maturity schedule and ample undrawn facilities. Investor's considerable financial flexibility is further supported by its portfolio's above-average characteristics in terms of size and number of holdings. In addition, Investor's ownership structure--with the Wallenberg Foundations controlling 48% of the voting rights--provides long-term stability.

Investor's exposure to share price volatility in its listed equity investments is a negative rating factor. Moreover, about a quarter of the company's portfolio is made up of wholly owned or controlled equity holdings, and private equity fund investments. We view these assets as higher risk and less liquid than the listed equity stakes, as they are typically more leveraged, unlisted, and often tightly controlled by Investor.

Key portfolio developments

In the first half of 2012, Investor made additional investments of close to Swedish krona (SEK) 5.3 billion in its core investments, including a SEK300 million equity infusion in healthcare services provider Aleris AB (not rated), EUR183 million investment in the mezzanine of, and SEK0.8 billion to buyout management's options in, single use surgical and wound care products manufacturer Molnlycke Health Care (not rated). In addition, Investor increased its investment in Finish power solutions firm Wartsila Oyj Abp (not rated), where it had been acquiring shares for a year. It invested an additional SEK3.2 billion, bringing total investment to about SEK4.1 billion for an 8.7% ownership. In parallel, Investor announced the creation of a joint company with garden and home consumer goods producer Fiskars Oyj Abp (not rated), which owns 13% of share capital, to pool their participation in Wartsila. Contributions to, and distributions from, financial investments amounted to about SEK2.9 billion and SEK2.6 billion, respectively.

Beyond the investment in Wartsila, which marks a first initiative beyond the Swedish border, we believe Investor's portfolio of core investments, representing more than three-quarters of total assets, should remain largely unchanged in the next couple of years, while there could be more asset rotations in the financial investments portfolio. Overall, we do not anticipate revising our current assessments of Investor's portfolio's liquidity, quality, and diversity.

Key cash flow and capital-structure developments

Investor's LTV ratio was above its internal target of 5%-10%, at the 17% we calculated on Oct. 2, 2012. On that day, it would have taken a 40% decline in asset values for our 25% threshold to be met.

Dividend inflows from portfolio companies should be close to SEK4.9 billion by year-end 2012, according to Investor. We anticipate lower operating expenses of about SEK0.4 billion (given the company's cost reduction efforts and the deconsolidation of subsidiary Investor Growth Capital's {IGC; not rated} costs), and financial costs in excess of SEK1.0 billion reflecting higher average net debt compared with 2011. Given the markedly higher dividends of SEK4.6 billion paid to shareholders compared with 2011, we believe operating cash generation--dividends received less operating and interest expenses and dividends paid--which was negative by about SEK1.0 billion in 2011, should be negative by some SEK1.3 billion in 2012. We expect operating cash generation to remain at this level in 2013, assuming a modest growth in both dividends received and paid. As a result, we expect total coverage--the ratio of dividends received to operating and net interest expenses plus dividends paid at holding company level--which was 0.8x in 2011, to be stable for the foreseeable future.

Liquidity

The 'A-1+' short-term rating reflects Investor's high cash reserves, unused committed credit lines, and well-drawn-out debt maturity schedule with an average maturity consistently longer than 10 years. We assess the company's liquidity as "exceptional," according to our criteria, as we estimate that it should be able to withstand severe adverse market conditions over the next two years while still having sufficient liquidity to meet its obligations, such that sources of funds should be at least twice as high as potential uses.

On June 30, 2012, we estimated that total liquidity sources amounted to at least SEK20 billion, including:

-- SEK6.8 billion in cash;

-- SEK10.0 billion in committed, undrawn credit line, 95% of which maturing in July 2017, with a one-year extension option. This revolving credit facility (RCF) is unsecured, and does not include financial covenants or any early repayment provisions in the event of a downgrade;

-- Between SEK4.5 billion and SEK5.0 billion to be received in dividends from portfolio companies, assuming payouts comparable to what Investor cashed in 2012 year-to-date; and

-- Some returns from private equity fund EQT (not rated) or IGC, as they exit some investments and return capital to their shareholders.

In the absence of short-term debt and identified investments (at the time of publication), we estimate Investor's liquidity needs over the 12 months to June 2013 to stand below SEK6 billion, including:

-- Operating, tax, and interest expenses of some SEK1.6 billion; and

-- A dividend payment of about SEK4.6 billion assuming flat return to shareholders.

Although Investor's dividend income barely covers its cash outflows in terms of net interest, operating and tax expenses, and dividend payments, the company's large cash resources should easily cover any negative discretionary cash flows. We also note that over the past six years, EQT funds and IGC have consistently returned about SEK1.6 billion per year to Investor.

Outlook

The stable outlook reflects our view that Investor will maintain very high financial flexibility and strong asset coverage over debt. We expect its LTV ratio to normally range between 5% and 10%, and not to exceed 25%. Maintenance of the ratings also depends on Investor's portfolio quality, including factors such as liquidity, the risk profile of investments, and portfolio diversification balanced with a sound debt maturity structure to minimize refinancing risk.

Higher-than-expected exposure to wholly owned or majority owned companies or unlisted holdings, or a reduction in overall portfolio quality, would likely result in a negative rating action.

Ratings upside potential is constrained, given the limited additional positive rating implications of further portfolio investment diversification or debt reduction.

Related Criteria And Research

-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009

-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- Rating Methodology for European Investment Holding and Operating Holding Companies, May 28, 2004

-- 2012 Midyear Global Credit Outlook: Interconnected Prospects, Interconnected Risks, June 8, 2012

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