DBRS Takes a Range of Rating Actions on 54 Preferred Shares/Securities Issued by Split Share Companies or Trusts

DBRS has today taken a range of rating actions on 54 structured preferred shares issued by 49 split share companies and trusts (the Issuers). All the trends are now Stable.

Each of the Issuers has invested in a portfolio of securities (the Portfolio) funded by issuing two classes of shares – dividend-yielding preferred shares or securities (the Preferred Shares) and capital shares or units (the Capital Shares). The main form of credit enhancement available to these Preferred Shares is a buffer of downside protection. Downside protection corresponds to the percentage decline in market value of the Portfolio that must be experienced before the Preferred Shares would be in a loss position. The amount of downside protection available to Preferred Shares will fluctuate over time based on changes in the market value of the Portfolio.

Of the 54 structured Preferred Share ratings updated today by DBRS, 32 have been upgraded, 18 have been confirmed and four have been downgraded. The majority of the ratings have been upgraded as a result of the strong gains in global equity markets over the past five months. In the first quarter of 2009, DBRS downgraded many of its Preferred Share ratings because of rapid and substantial declines in company net asset values (NAVs). From August 31, 2008, to March 9, 2009, the S&P/TSX Composite Index lost 45% of its value. Since March 9, the index has gained back more than half of those losses. As a result, many of the Preferred Shares that were downgraded in February or March have seen significant increases in NAV and are now being upgraded.

In addition to the recent rebound in equity markets, another factor in today’s rating changes is the release of an updated DBRS split share methodology, “Rating Canadian Split Share Companies and Trusts,” which details DBRS’s approach to rating Preferred Shares issued by split share companies and trusts. DRBS has applied a number of changes to strengthen its split share rating process, including the following:

(1) Raising its initial downside protection requirements for split share issuers whose Portfolios are concentrated in the securities of a single issuer or a single industry.

(2) Lowering its initial ratings for certain issuers based on the size of distributions to the Capital Shares and the triggers for suspending such distributions.

(3) Raising its requirements for assigning Preferred Share ratings in the Pfd-1 range.

In addition, the methodology contains a surveillance section that states the time period required before DBRS will place ratings Under Review or upgrade or downgrade ratings as a result of changes in the NAV of a split share company or trust.

The application of the updated split share methodology will generally result in greater requirements for initial downside protection to achieve a particular Preferred Share rating. DBRS has applied certain critical aspects of the methodology retroactively to its universe of outstanding ratings. Consequently, many Preferred Share upgrades resulting from recent increases in market valuations are less sizable than they would have been without the negative effects of applying the revised methodology.

DBRS will continue to closely monitor changes in the credit quality of these Preferred Shares. The timing of DBRS rating actions will generally follow the surveillance guidelines listed in the revised split share methodology.

Notes:
The applicable methodology is Rating Canadian Split Share Companies and Trusts, which can be found on our website under Methodologies.

This is a Structured Finance rating.