PrefBlog

DBRS has announced that it:

has today confirmed Brookfield Office Properties Inc.’s (BPO or the Company) Senior Unsecured Notes (the Notes) rating at BBB and Cumulative Redeemable Preferred Shares, Class AAA rating at Pfd-3, both with Stable trends. This rating action removes the ratings from Under Review with Developing Implications.
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In July 2016, BPY completed an internal restructuring to consolidate the ownership of its core retail and office assets within the United States by transferring to a subsidiary of BPO its core retail investments (the Transaction).
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In DBRS’s view, the Transaction modestly improves BPO’s business risk assessment by increasing the size and scale of the Company’s real estate investments, which complement asset quality and diversification by asset type, partially offset by geographic concentration in the United States. DBRS estimates annual EBITDA will increase to $1.7 billion from $1.0 billion on a pro forma basis in Q1 2016. DBRS also believes the core retail investments complement the quality of BPO’s office assets and will provide a stable and diverse source of cash flow for the Company.

The Transaction also has a modestly positive impact on BPO’s financial risk assessment by improving key financial metrics. DBRS estimates an improvement in BPO’s EBITDA interest coverage (including capitalized interest) to 1.72 times (x) from 1.59x and debt-to-EBITDA to 13.5x from 14.2x, respectively.

With the improvement of EBITDA interest coverage (including capitalized interest) to levels above 1.70x, BPO has met DBRS’s 12-month expectation. DBRS expects BPO to improve this key metric above 2.00x and its fixed-charge coverage to 1.75x over the longer term, which is more consistent with the current rating category.

The core retail investments are held by various entities that now structurally sit in between BPO and its key U.S. operating assets. Three of these entities (the BPO Co-Borrowers), along with certain subsidiaries of BPY, are co-borrowers of a $2.5 billion external credit facility (the Credit Facility). While the BPO Co-Borrowers have not yet drawn on the Credit Facility (currently, $1.14 billion has been drawn by the other co-borrowers), the Credit Facility’s agreement states that all borrowers (including the BPO Co-Borrowers) are jointly and severally liable for any amounts drawn. As such, the Notes are structurally subordinated (see the discussion on structural subordination below) to the lenders of the Credit Facility. DBRS has also assumed the Credit Facility is fully drawn and included this amount in its calculation of BPO’s key financial metrics.

STRUCTURAL SUBORDINATION
As discussed above, the BPO Co-Borrowers are jointly and severally liable for any amounts drawn from the Credit Facility. The transfer of the core retail investments to a subsidiary of BPO has structurally placed the lenders of the Credit Facility closer to BPO’s key U.S. operating subsidiaries relative to the holders of BPO’s Notes. As such, the lenders of the Credit Facility now rank ahead of BPO’s Noteholders in their claim to the cash flow and assets of the Company’s key U.S. operating subsidiaries and core retail investment in an event of default scenario.

DBRS has not lowered the rating of the Notes by one notch, as DBRS believes the issue of subordination is mitigated by several credit-enhancing factors. These factors are as follows: (1) The core retail investment is self-sustaining and generates more-than-sufficient cash flow to fund its own capital requirements and any amounts drawn on the Credit Facility. (2) The core retail investment has added significant asset value ($9.1 billion) relative to the debt incurred by BPO. (3) BPO will benefit from substantial distributions from the core retail investment. (4) BPO’s operating subsidiaries and investments (excluding the core retail investment and key U.S. operating subsidiaries) will continue to provide an adequate source of cash flow distributions as well as account for a significant proportion of the Company’s assets.

DBRS notes, however, that any material deterioration in the credit quality of the core retail investment (e.g., caused by an increase in debt and/or reduced cash flow) or any material increase in subordination could result in the reduced effectiveness of the above-noted mitigating factors. In such an event, a one-notch downgrade of BPO’s ratings would be warranted.

The November 1, 2016 announcement of a continued review was reported on PrefBlog.

Affected issues are: BPO.PR.A, BPO.PR.C, BPO.PR.J, BPO.PR.K, BPO.PR.N, BPO.PR.P, BPO.PR.R, BPO.PR.S, BPO.PR.T, BPO.PR.W, BPO.PR.X and BPO.PR.Y.

This entry was posted on Tuesday, November 8th, 2016 at 10:37 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.