SCFI månadsrapport – januari 2023

SCFI Monthly Report – January 2023

Scandinavian Credit Fund I AB (publ) reports a NAV rate for January of 100.17. That's an increase of 0.17 %. We have not had any new lending during January, however, four lifts have been carried out on already granted credits corresponding to approximately SEK 27.6 million.

The fund is still closed for deposits and withdrawals due to large redemptions during November and December as previously communicated. The fund will pay out SEK 40–50 million in February, but the fund will return with exact details when the payment is to take place. The fund would like to point out again that the closure is not the result of any change in risk in the portfolio, but solely linked to large redemptions during the period that deviate from historical redemptions.

The NAV was affected by the fact that the fund's listed shareholdings have increased somewhat during the month, at the same time that the fund chose to increase reserves as a result of the updated macro scenario and future prospects in the market. The fund sees indications that recovery, reduced inflation and falling interest rates, will take longer than previously expected. Reserves and borrowers are evaluated monthly to act and adjust the value if the risks rise or changes in the market affect sectors or borrowers.

The fund continuously analyzes the borrowers in the portfolio and pushes for refinancing or repayments. The market for refinancing and sales has tightened, which makes it more difficult for the fund to release capital quickly. The fund also works with divesting previously mortgaged assets to free up capital to handle redemptions but also the possibility of financing new objects in the future. The market for new lending remains strong and interest rates would have a major impact on returns. Releasing capital in mortgage-realized assets or bringing in capital when the redemption is handled will create an increase in yield. The fund has continued to have a strong pipeline of clients waiting for capital and also looks forward to interest rates continuing to rise, which creates further and greater opportunities to increase returns.

The market and the economy
Stock markets have consistently increased at the beginning of 2023, which has largely been attributed to the outlook for the economy. GDP declined during the end of the fourth quarter in Sweden. Similar developments have also been seen in Germany. The PIGS countries (Portugal, Italy, Greece and Spain) may have problems with interest rate increases from the ECB due to high government debts. The ECB has flagged that it will sell government bonds and the ECB has a high concentration of PIGS countries' bonds. The effect is that these countries can be hit by higher central bank interest rates from the ECB, which pushes apart the interest rate spreads against other more creditworthy euro countries in Europe.

The Swedish krona has weakened during the month, especially towards the end. In order not to import inflation, the Riksbank therefore needs to raise the interest rate. Higher interest rates generally lead to a stronger currency, which then has a spillover effect on Sweden. Lagarde, the president of the ECB, has been clear that it is expected that two interest rate increases of 50 points will come. In Spain, core inflation has turned upwards, which gives the ECB further arguments to stick with interest rate increases. If the ECB raises the interest rate, the Riksbank also needs to raise to prevent the krona from weakening further. The expectation before the monetary policy announcement in Sweden on February 9 is an increase of 50 basis points from the Riksbank. The Riksbank also indicates that it wants to strengthen the krona, which also motivates future increases.

Since October, the market has started discounting that the economy will begin to turn around, the stock markets have performed positively, interest rate spreads have narrowed and long-term interest rates are down. Traditionally, the effect of interest rate increases usually takes considerably longer. Interest rate increases will continue, the indications are that the decline in economic activity and the rise in inflation will continue for longer than the market previously expected. The assessment is that the companies will have continued challenges in 2023, which may increase the risks of continued liquidity problems and also defaults.

The fund has increased the provisions during January to compensate for a worsening macro scenario, the fund sees no significant increased risk in any specific counterparty.

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