DBRS Changes Trend on Bow Centre Street Limited Partnership Ratings to Stable from Negative, Confirmed at “A”

DBRS Limited (DBRS) has today confirmed the ratings of 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,” and changed the ratings’ trends to Stable from Negative. The trend changes reflect DBRS’s recent confirmation of Encana Corporation’s (Encana, accounting for 100% of the Property’s total space on head lease basis) ratings at BBB (low) and the revision of Encana’s rating trends to Stable from Negative (see DBRS press release dated October 7, 2016). As such, DBRS no longer believes the likelihood of additional rating pressure for Encana to occur in the near term and for it to have negative rating implications for the Bonds.

At the time the Bonds’ trends were changed to Negative from Stable on July 18, 2016, DBRS stated that if the trend on Encana’s ratings returned to Stable from Negative, DBRS may consider revising the Bonds’ trends to Stable from Negative. Since then, the credit risk profile of Encana and a number of other DBRS-rated energy companies have modestly benefited from cost cutting initiatives and a better pricing environment for oil and natural gas relative to the beginning of 2016. In addition, DBRS believes that oil prices should continue to improve modestly as global oil demand and supply moves towards convergence. Notwithstanding current market rents are below Encana’s in-place rents and the market vacancy rates have increased significantly over the past year, DBRS’s original assumptions used in its loan- and property-level analysis still stand, as the assumptions have already incorporated a significant level of stress to accommodate for the volatility in the downtown Calgary office market.

The Bonds’ ratings continue to be supported by the high quality and attractive location of The Bow and its 25-year lease to Encana Corporation, which should continue to provide cash flow stability and predictability, as well as good protection from the current challenging Calgary office market fundamentals. 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.

For the last 12 months ended June 30, 2016, the Bow was fully occupied and generated approximately $94.8 million of NOI. Debt service coverage was solid at 2.75 times in the same period, in line with DBRS’s expectation.

RATING DRIVERS
Should Encana’s credit risk profile deteriorate, it would result in at least the same magnitude of decline for the Bonds’ ratings.

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 (June 2016), 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.