DBRS Assigns Provisional Rating of AA (low), Stable, to Ivanhoé Cambridge II Inc.’s Senior Unsecured Debentures

DBRS Limited (DBRS) assigned a provisional Senior Unsecured Debenture rating of AA (low) with a Stable trend to Ivanhoé Cambridge II Inc. (IC II or the Company). As of June 15, 2018, IC II had no Senior Unsecured Debentures outstanding; if IC II were to issue Senior Unsecured Debentures in the future, DBRS expects the issuance to be on terms and conditions consistent with market practice and satisfactory to DBRS. The rating takes into consideration IC II’s stand-alone credit risk profile, expected low level of secured debt in its capital structure, DBRS’s view of implicit support by Caisse de dépôt et placement du Québec (CDPQ, rated AAA with a Stable trend by DBRS), and DBRS’s expectation of deterioration in IC II’s debt-to-EBITDA to within the 6.0 times (x) to 7.0x range in the medium to long term.

The stand-alone rating is supported by IC II’s institutional quality retail and office assets, strong market position in key Canadian markets and conservative financial profile via the portfolio’s capacity to generate robust operating cash flows ($511 million, pro forma F2017), while acknowledging the expectation of higher leverage metrics in the near to medium term. The stand-alone rating is constrained by the portfolio’s relatively small size (pro forma F2017 EBITDA of $467 million) for the rating category, significant property concentration (59.5% pro forma F2017 net operating income derived from top ten properties) and some geographic concentration in two key markets (Montréal and Calgary).

The Stable rating outlook reflects DBRS’s view that, in the near to medium term, IC II will generate modest EBITDA growth supported by the continued stability of income generated from institutional quality office and retail assets, coupled with DBRS’s expectation of material deterioration in IC II’s financial risk metrics in the medium term, albeit from very strong levels, particularly total debt-to-EBITDA and EBITDA interest coverage, as IC II becomes active in the senior unsecured debt market.

Although unlikely for the foreseeable future, DBRS would consider a positive rating action should IC II significantly increase the size and scale of its portfolio as measured by EBITDA while continuing to diversify and upgrade its asset holdings, maintaining key financial metrics at levels commensurate with the current rating category, and keeping a low proportion of secured debt-to-total debt (less than 40%). Alternatively, DBRS would consider a negative rating action should one or more of the following factors occur (on a sustained basis): (1) DBRS changes its views on the level of implicit support provided by CDPQ; (2) secured debt-to-total debt exceeds 40%; (3) the operating environment deteriorates, leading to higher vacancy and declines in operating cash flow; and (4) the Company’s financial metrics deteriorate, resulting in total debt-to-EBITDA greater than 8.0x.

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

The principal methodologies are Rating Entities in the Real Estate Industry (April 2018), DBRS Criteria: Guarantees and Other Forms of Support (January 2018) and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (December 2017), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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