DBRS Places Rating of World Financial Split Corp. Under Review with Negative Implications

DBRS has today placed the Pfd-4 (high) rating of the Preferred Shares issued by World Financial Split Corp. (the Company) Under Review with Negative Implications.

In February 2004, the Company raised gross proceeds of approximately $471 million by issuing 18.85 million Preferred Shares at $10 each and an equal number of Class A Shares at $15 each. The fund invests in a portfolio that includes common shares (the Portfolio) selected from the ten largest financial services companies by market capitalization in each of Canada, the United States and the rest of the world (the Portfolio Universe). In addition, up to 20% of the net asset value (NAV) of the Company can be invested in common equity securities of financial services companies that are not part of the Portfolio Universe but meet certain market capitalization and credit rating requirements. The initial split share structure provided downside protection of approximately 57% to the Preferred Shares (after expenses).

The holders of the Preferred Shares receive fixed cumulative quarterly distributions equal to 5.25% per annum. The fixed distributions of dividends on the Preferred Shares are funded from the dividends received on the Portfolio Shares, with covered call option premium income and, if necessary, from the sale of the Portfolio’s shares. Distributions are not paid to Class A Shareholders if the asset coverage available to the holders of the Preferred Shares would be below 1.5 times (NAV of $15) after payment of the distribution. As a result, no distributions have been paid on the Class A Shares since September 2008.

The NAV and the dividend income of the Portfolio have declined significantly over the past few years because of the high Portfolio concentration in global financial institutions. The current dividend income of the Portfolio does not fully cover the Preferred Share distribution; however, less than one year remains until the termination of the Company, mitigating the negative impact of the shortfall.

The NAV of the Company declined over the past four months, dropping from $13.35 on March 31, 2010, to $11.60 on July 31, 2010. The current downside protection available to the Preferred Shareholders is approximately 14% (as of July 31, 2010). As a result of the decreased protection available to the Preferred Shares, the rating has been placed Under Review with Negative Implications. The resolution of the Under Review status will depend on the performance of the Portfolio during August and September.

The final redemption date for both classes of shares issued is June 30, 2011.

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.