DBRS Confirms Bow Centre Street Limited Partnership Ratings at “A,” Stable Trend

DBRS Limited (DBRS) has today confirmed the ratings on the Series A, Series B and Series C Secured Bonds (the Bonds) of Bow Centre Street Limited Partnership (the Issuer) secured by The Bow (the Property) at “A,” with a Stable trend. The rating confirmations reflect the Bow’s steady operating performance and modestly improving financial metrics over the past year, despite the currently challenging office leasing environment in downtown Calgary. For the last 12 months ended March 31, 2016, the Bow was fully occupied and generated approximately $95.4 million of annual NOI. Debt service coverage was solid at 2.77 times (x) in the same period, in line with DBRS’s expectation.

The ratings continue to be supported by the high quality and attractive location of The Bow, its 25-year lease to Encana Corporation (Encana, rated BBB with a Negative trend by DBRS) and solid debt service coverage. The ratings also consider the significant exposure to Encana as the Property’s single tenant, as well as the modest step-ups in rental rates over the term of the lease. DBRS notes its recent trend change to Negative from Stable on Encana’s ratings. DBRS does not expect a downgrade by one notch of Encana’s ratings to have any credit implications for the Bonds, but notes if Encana’s ratings were to fall into non-investment grade territory, a negative rating action would likely occur.

Notwithstanding a deterioration in Encana’s credit risk profile, the Stable trends consider DBRS’s expectation that the long-term nature of Encana’s lease should continue to provide stability and predictability to cash flow, as well as good protection from unfavourable changes in market conditions. In addition, NOI and coverage ratios are expected to improve modestly going forward based on nominal office and parking stall rental rate increases of 0.75% and 1.50% per year, respectively, over the term of Encana’s lease.

In terms of financial leverage, DBRS notes that total secured debt outstanding may not exceed $800 million during the term of Encana’s lease, and $365 million at the end of the lease in 2038. There is currently approximately $780.3 million of secured bonds outstanding.

RATING DRIVERS
While DBRS does not expect a downgrade by one notch of Encana’s ratings to have any credit implication for the Bonds, a negative rating action could occur if there is a more material deterioration in Encana’s credit risk profile, resulting in Encana’s ratings falling into non-investment grade territory.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Entities in the Real Estate Industry (May 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.