DBRS Limited (DBRS Morningstar) confirmed Ivanhoé Cambridge II Inc.’s (IC II or the Company) Issuer Rating and Senior Unsecured Debentures rating at AA (low) with Stable trends. The rating confirmations take into consideration the sizable impact the ongoing Coronavirus Disease (COVID-19) pandemic and related economic slowdown has had on IC II's operations, as well as DBRS Morningstar's revised assessment of IC II's business risk assessment.
DBRS Morningstar acknowledges IC II's approach to working through the pandemic with its portfolio of tenants in partnership, thus sharing in the financial hardship wrought by the pandemic. Indeed, EBITDA declined to $252 million for the year ended December 31, 2020, from $465 million in the prior year, resulting in IC II's total debt-to-EBITDA deteriorating to 4.1 times (x) at December 31, 2020, from 2.3x at December 31, 2019. Notwithstanding, IC II’s total debt-to-EBITDA remains consistent with DBRS Morningstar's prior expectations, which incorporated increasing leverage into the ratings, as the Company has tempered capital expenditures and financing initiatives to partially offset significant financial impacts from the pandemic. Negative impacts have been particularly pronounced in IC II’s retail portfolio, where rent collections have been much lower than prepandemic levels, and the Company has had to engage tenants on lease renegotiations in the form of rent abatements and deferrals. At the same time, IC II has recognized significant bad debt expenses, and retail vacancy continues to increase because of tenant bankruptcies.
DBRS Morningstar has lowered its assessment of IC II's asset quality and portfolio size while increasing its assessment of IC II's market position, the combined effect of which is modestly credit negative. In terms of asset quality, DBRS Morningstar is of the view that, while still of high overall quality, demand for IC II's shopping centre assets will take time to recover, as evidenced by cash flow volatility through the pandemic, the discretionary nature of its tenants with elevated counterparty risk, and significantly lower valuations. Partially offsetting lower asset quality and portfolio size is DBRS Morningstar's recognition of IC II's solid market position by way of its parent, Ivanhoé Cambridge Inc. (Ivanhoé Cambridge), as an established player in the global real estate industry with $60.4 billion in gross assets under management at December 31, 2020, and backed by one of Canada's largest pension plans, Caisse de dépôt et placement du Québec (CDPQ; rated AAA with a Stable trend by DBRS Morningstar).
The Stable trends consider DBRS Morningstar's expectation for some further modest deterioration in IC II's total debt-to-EBITDA to the 5.0x range in the near to medium term as EBITDA gradually recovers while IC II resumes its debt financing initiatives, distributing excess cash to IC II's parent, Ivanhoé Cambridge, thus increasing total debt outstanding. The Stable trends also reflect DBRS Morningstar's view that the worst of the economic fallout from the coronavirus pandemic has already occurred and that IC II should experience improving rent collection rates, fewer rent abatements and deferrals, and improving bad debt expenses, supporting a recovery in EBITDA, notwithstanding the current third wave of the pandemic in Canada. DBRS Morningstar notes that the ratings have always taken into consideration DBRS Morningstar's expectation that IC II's financial risk metrics would deteriorate materially, albeit from very strong levels. The Stable trends also consider IC II's continued access to liquidity by way of its fully available $300 million revolving credit facility with no maturities of senior unsecured debt until June 2023, when the $500 million Series 1 Senior Unsecured Debentures come due, and $10.8 billion in unencumbered assets that could be pledged as security for loans, if needed.
The ratings are supported by (1) DBRS Morningstar’s view of implicit support from IC II’s ultimate parent, CDPQ; (2) IC II's strong market position through Ivanhoé Cambridge, CDPQ’s leading global real estate management platform; (3) the Company’s high-quality real estate portfolio; (4) the Company's diversified and well-laddered lease profile; and (5) IC II’s solid balance sheet with a low proportion of secured debt in the capital structure. The ratings are constrained by (1) concentration risks in the form of significant property concentration, geographic concentration, and asset type concentration; (2) average counterparty risk; and (3) a relatively small portfolio as measured by EBITDA.
DBRS Morningstar would consider a negative rating action if one or more of the following factors occur on a sustained basis: (1) DBRS Morningstar changes its view on the level of implicit support provided by CDPQ; (2) the secured debt-to-total debt ratio exceeds 40%; or (3) IC II's key financial metrics deteriorate significantly more than currently expected, resulting in total debt-to-EBITDA greater than 7.3x on a sustained basis, all else equal. A positive rating action is not contemplated at this time.
DBRS Morningstar notes that, in its calculations of DBRS Morningstar-adjusted metrics such as total debt-to-EBITDA, DBRS Morningstar now considers total debt at face value ($1,043 million at December 31, 2020) instead of fair value ($1,090 million) on the balance sheet, as was done previously.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Entities in the Real Estate Industry (April 23, 2021; https://www.dbrsmorningstar.com/research/377358) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/research/372344), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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 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 email@example.com.
The rated entity or its related entities did participate 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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