DBRS Downgrades Multi Select Income Trust Preferred Securities to Pfd-3 (high)

DBRS has today downgraded the Preferred Securities issued by Multi Select Income Trust (the Trust) to Pfd-3 (high), with a Stable trend, from Pfd-2 (low). The rating has been removed from Under Review with Negative Implications, where it was placed on December 19, 2008.

In September 2004, the Trust raised gross proceeds of approximately $144 million by issuing 7.2 million Preferred Securities at $10 each and an equal number of Capital Units at $10 each, with a final redemption date of September 30, 2009 (the Redemption Date) for the Trust. The net proceeds from the offering were invested in a broadly diversified portfolio of Canadian income trusts (the Portfolio). The initial split share structure provided downside protection of approximately 50% to the Preferred Securities.

The holders of the Preferred Securities receive fixed quarterly distributions yielding 6.5% per annum. There is a Preferred Security Test that does not permit any cash distributions to the Capital unitholders if the NAV of the portfolio is less than 1.5 times the repayment price for the Preferred Securities.

The NAV of the Portfolio has declined significantly, dropping from $19.51 per security to $13.99 in the last year, a decline of 28%. The current downside protection available to holders of the Preferred Securities is approximately 29% (as of February 12, 2009). The downgrade of the Preferred Securities is primarily based on the lower level of asset coverage available to cover the Preferred Securities principal.

There are less than eight months until the Redemption Date, which has limited the severity of the downgrade to the Preferred Securities. If the Redemption Date was to be extended past September 30, 2009, then negative rating action would likely be required.

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

The applicable methodology is Split Share Issuers: A Performance Overview which can be found on our website under Methodologies.

This is a Structured Finance rating.