DBRS Rates TD Split Inc. Class C Preferred Shares, Series 1 Pfd-2 (low)

DBRS has today assigned a rating of Pfd-2 (low) to the Class C Preferred Shares, Series 1 (the Class C Preferred Shares) issued by TD Split Inc. (the Company) and discontinued the rating on the Class B Preferred Shares, which have been repaid. The Class B Preferred Shares and the Class B Capital Shares previously issued by the Company were redeemed today in accordance with their original terms. The Company has issued 3.12 million Class C Preferred Shares at $10 each and an equal number of Class C Capital Shares, Series 1 (the Class C Capital Shares) at $18 each in order to maintain the leveraged split share structure of the Company. The final redemption date for the Class C Preferred Shares and the Class C Capital Shares is November 15, 2015.

The net proceeds from the issuance of the Class C Preferred Shares and Class C Capital Shares were used by the Company to purchase common shares (the Portfolio) of The Toronto-Dominion Bank (TD). The Portfolio provides initial downside protection of approximately 62% to the holders of the Class C Preferred Shares. The dividends received from the Portfolio will be used to pay a fixed cumulative quarterly distribution to holders of the Class C Preferred Shares, yielding 4.75% annually on the initial issue price. After the Class C Preferred Share dividends and Company expenses have been paid, holders of the Class C Capital Shares are expected to receive all remaining net income of the Company. Based on the current dividend yield on the Portfolio, the initial Class C Preferred Share dividend coverage ratio is approximately 1.5 times.

The Pfd-2 (low) rating of the Class C 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 TD.

The main constraints to the rating are the following:

(1) The downside protection provided to holders of the Class C Preferred Shares is dependent on the value of the shares in the Portfolio.

(2) Volatility of price and changes in the dividend policies of TD may result in significant reductions in downside protection or dividend coverage from time to time.

(3) The concentration of the entire Portfolio in the common shares of TD.

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.