DBRS Limited (DBRS Morningstar) assigned a recovery rating of RR4 to Cominar Real Estate Investment Trust’s (Cominar or the Trust) Senior Unsecured Debentures, following the assignment of a BB (high) Issuer Rating to the Trust. Issuer ratings represent solely the likelihood of default without consideration of the relative priority of various debt issues’ claims to the company’s assets in a default scenario. The recovery rating determines the degree to which the instrument rating (i.e., the rating on Cominar’s Senior Unsecured Debentures) is notched (up or down) relative to the Trust’s Issuer Rating as per “DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers” (the Recovery Criteria) and as detailed in the recovery rating scale below. To analyze the potential recovery for various debt classes in the event of default, DBRS Morningstar first simulates a default scenario, which includes estimating both when and under what circumstances a default could hypothetically occur. As part of the analysis, DBRS Morningstar estimates the potential enterprise value of the company that would be available to satisfy the various claims of the company’s creditors under this scenario. The recovery rating for a specific debt issue is based on the anticipated recovery rate for that class of creditor. Default scenarios and the assumptions on which they are based are, by definition, hypothetical.
For the default scenario, DBRS Morningstar stressed net operating earnings to the default point (e.g., Cominar is unable to fully service outstanding indebtedness). For valuation, DBRS Morningstar utilized the enterprise valuation approach per the Recovery Criteria; a range of stressed capitalization rates were applied to the above-mentioned stressed net operating earnings, which necessarily implies fairly severe asset impairment. To assess recovery, DBRS Morningstar incorporated incremental indebtedness (and associated interest expense) available through the assumed full drawn down of the Trust’s credit facilities. DBRS Morningstar concluded that, despite the wide divergence in scenarios using the above-noted assumptions, it was likely that holders of Cominar’s Senior Unsecured Debentures would recover near the middle of the range between 30% and 60%, representing a recovery rating of RR4.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (June 4, 2020), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (August 22, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The rated entity or its related entities did in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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