DBRS Rates Big 8 Split Inc. Class C Preferred Shares, Series 1 Pfd-2

DBRS has today assigned a rating of Pfd-2 to the Class C Preferred Shares, Series 1 (the Class C Preferred Shares) issued by Big 8 Split Inc. (the Company). The Class C Preferred Shares have been issued as part of a re-leveraging of the Company. Prior to the re-leveraging, there were 1,067,005 Class B Preferred Shares, Series 1 (the Class B Preferred Shares) and an equal number of Class A Capital Shares (the Capital Shares) outstanding. The Company declared and paid a dividend in Capital Shares to the current holders of the Capital Shares (0.6 Capital Shares for each Capital Share outstanding). The Company subsequently issued 1,165,203 new Class C Preferred Shares at $12 each and 525,000 additional Capital Shares at $20 each through a public offering. A greater number of Class C Preferred Shares were issued so that an equal number of Capital Shares and Preferred Shares of the Company would remain outstanding following the Capital Share dividend payment. The Class C Preferred Shares rank pari passu with the Class B Preferred Shares with respect to return of principal and payment of dividends. The Capital Shares now provide downside protection of approximately 60% (after offering expenses) to the Preferred Shares of the Company.

The Company has not completed a rebalancing of its portfolio (the Portfolio), maintaining the current weightings of the underlying holdings (8% to 15% for each company). The Portfolio consists of common shares of Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Toronto-Dominion Bank, Great-West Lifeco Inc., Manulife Financial Corporation and Sun Life Financial Inc.

The dividends received from the Portfolio will be used to pay fixed cumulative quarterly distributions to holders of the Preferred Shares of the Company. The Class C Preferred Shares yield 5.75% annually on the issue price of $12 per share. The Capital Shares are expected to receive all excess dividend income after Preferred Share distributions and other Company expenses have been paid. Based on the current dividend yield on the Portfolio, the initial Preferred Share dividend coverage ratio is approximately 1.5 times.

The Pfd-2 rating of the Preferred Shares is primarily based on the downside protection and dividend coverage available, as well as on the credit quality and consistency of dividend distributions of the Portfolio holdings.

The main constraints to the rating are the following:

(1) The downside protection available to holders of the Preferred Shares depends on the value of the common shares held by the Portfolio.

(2) The Portfolio is entirely concentrated in the Canadian financial services industry, which in the past has often experienced greater common share price volatility than other industries.

(3) Changes in dividend policies of the banks and insurance companies included in the Portfolio may result in reductions in Preferred Share dividend coverage from time to time.

The scheduled final maturity date of the Class C Preferred Shares is December 15, 2013.

DBRS will monitor the status of the Class C Preferred Shares and provide rating updates as required.

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

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.