DBRS Releases Split Share Rating Methodology and Overview

DBRS has today released “Split Share Issuers: A Peformance Overview,” which outlines its approach to rating the preferred shares of a split share issuer in Canada. The methodology is intended to give investors an overview of the key factors DBRS considers when rating split share transactions and offer guidance on the levels of downside protection as well as various analytical indicators that drive DBRS’s internal rating criteria.

DBRS has witnessed significant growth in the split shares market in terms of the number of ratings issued, the market size and the sponsors. The preferred share in a split share structure provides a leveraged exposure to a portfolio (common shares, preferred shares, income trust units and other financial instruments) for the capital share investor. The preferred share holders receive a fixed dividend from the underlying portfolio, plus the added benefit of principal protection by the level of available downside protection (the percentage that the capital share represents in the capital structure).

This study identifies some of the risk elements and structural mitigants inherent in certain split share structures and provides an overview of trends from 1998 to 2006 and also provides plus a comparative table of the outstanding transactions as rated by DBRS.