DBRS Morningstar Corrects and Downgrades Ratings of First Mortgage Bonds Issued by Bow Centre Street Limited Partnership

DBRS Limited (DBRS Morningstar) corrected an error in a July 10, 2020, press release for Bow Centre Street Limited Partnership, in which DBRS Morningstar inaccurately referred to the ratings of Ovintiv Inc. as “rated BBB and Under Review with Negative Implications by DBRS Morningstar.” In fact, DBRS Morningstar downgraded Ovintiv Inc.’s ratings to BBB (low) and removed the ratings from Under Review with Negative Implications on June 8, 2020. Consequently, the credit ratings of the first mortgage bonds issued by Bow Centre Street Limited Partnership were affected and are hereby corrected accordingly. As of July 29, 2020, the previous incorrect press release issued on July 10, 2020, and a correction press release issued on July 13, 2020, are being removed from circulation to avoid confusion. This correction press release is being issued as a replacement.

DBRS Morningstar downgraded the ratings on the following first mortgage bonds (the Bonds) issued by Bow Centre Street Limited Partnership (the Issuer):

-- Series A Secured Bonds to BBB (low) (sf) from A (sf)
-- Series B Secured Bonds to BBB (low) (sf) from A (sf)
-- Series C Secured Bonds to BBB (low) (sf) from A (sf)

All trends are Negative.

The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable to reflect updated performance of the asset including market fundamentals. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The Bonds are secured by the Issuer’s ownership interest in The Bow (the Property) and have a total current outstanding balance of $760.5 million. The Series A, B, and C Bonds have maturity dates on June 14, 2021; June 14, 2022; and June 13, 2023, respectively. Built from 2012 to 2013, The Bow is a 58-storey high-quality office building comprising over 2.0 million square feet (sf) of rentable area in Calgary’s central business district. The entire building is leased to Encana Leasehold Limited Partnership and fully guaranteed by Ovintiv Inc. (formerly EnCana Corporation; rated BBB (low) with a Negative trend by DBRS Morningstar) for 25 years with rent escalations of 0.75% per annum (p.a.) for the office and retail rents and 1.5% p.a. for parking income. The lease will expire on May 13, 2038. . The subject property currently serves as Ovintiv’s corporate headquarters, but it should be noted that in October 2019, the company announced plans to move its headquarters to the United States. At the time of the announcement, the company reported the headquarters move would not have an impact on its Canadian workforce.

As of January 2020, approximately 497,700 sf (24.6% of total office space) was physically vacant and approximately 577,109 sf (28.9% of total office space) was occupied by subtenants or sub-subtenants. The current contractual office rent is $43.83 per sf (psf); however, as per CBRE Limited’s “Calgary Downtown Office Marketview Q1 2020” report, the market vacancy and market rent for Class AA office in Calgary’s central core submarket were 14.8% and $21.94 psf, respectively. The sustained decline in the performance of the Calgary office market over the last several years, and the diminished outlook for a meaningful recovery amid the coronavirus pandemic were considered as part of these rating actions.

Given that the in-place rent from the single long-term credit tenant (LTCT) is significantly higher than market rent and the lease term extends beyond the Bond maturities, DBRS Morningstar valued the Property using a discounted cash flow approach. DBRS Morningstar applied a discount rate of 7.25% to derive the present value of the LTCT’s future rental payment and DBRS Morningstar’s projected dark value ($377.0 million) of the Property at the end of the lease term, resulting in a DBRS Morningstar Value of $1.1 billion, a variance of -35.4% from the 2012 appraised value of $1.7 billion. The DBRS Morningstar Value implies an LTV of 68.2% compared with the LTV of 44.1% on the appraised value in 2012.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totalling 1.00% to account for property quality and market fundamentals. It should be noted that any change to the rating of Ovintiv Inc. during the Bonds’ terms is expected to have an effect on the ratings of the Bonds.

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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The DBRS Morningstar Sovereign group released on April 16, 2020 a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on July 22, 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

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.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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@dbrsmorningstar.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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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