DBRS Upgrades Brookfield Soundvest Split Trust Preferred Securities to Pfd-4 (low)

DBRS has today upgraded the Preferred Securities issued by Brookfield Soundvest Split Trust (the Trust) to Pfd-4 (low) from Pfd-5 (high).

In March 2005, the Trust raised gross proceeds of $180 million by issuing 7.2 million Preferred Securities (at $10 each) and an equal number of Capital Units (at $15 each). The net proceeds from the initial offering were invested in a diversified portfolio of Canadian income trusts (the Portfolio). Holders of the Preferred Securities receive fixed quarterly interest payments yielding 6% annually. The Capital Units are expected to receive regular monthly cash distributions, subject to the Preferred Security asset coverage ratio being greater than 1.4 times. The Capital Unit distribution has been suspended since October 2008 due to the failure of the asset coverage test.

On April 20, 2010, at an extraordinary meeting of the capital unitholders of the Trust, a reorganization of the Trust was approved. As part of the reorganization, the Trust’s investment strategy and restrictions were amended to broaden the universe of eligible investments and increase flexibility in the management of the Trust. The changes were made in anticipation of the impending change in the taxation of income trusts in Canada, starting January 1, 2011. Prior to the amendments, there were permitted ranges for various types of income trusts, which were eliminated as part of the reorganization. Eligible investments of the Trust now include common shares and preferred shares, income trusts, income securities (including bonds and debentures), real estate investment trusts, Canadian mortgage-backed securities and other equity securities. In addition, the manager of the Trust was changed from Brookfield Investment Management to Brookfield Soundvest Capital Management Ltd. and the Trust’s name was changed from Brascan SoundVest Rising Distribution Split Trust to Brookfield Soundvest Split Trust.

As of September 30, 2010, the Portfolio primarily consisted of various types of income trusts. The composition of the Portfolio may change significantly in 2011 as more income trusts convert to corporations. The Portfolio provides downside protection of approximately 29% to the holders of the Preferred Securities (as of November 30, 2010).

Over the past four months, the net asset value (NAV) of the Trust has increased from $12.41 to $14.07, an increase of approximately 13%. Furthermore, the downside protection has fluctuated between 16% and 29% in 2010 to date compared with 2% to 15% from August to November 2009. This significant increase in protection has resulted in an upgrade in the rating of the Preferred Securities to Pfd-4 (low) from Pfd-5 (high). The upgrade has been limited to one notch due to the lower credit quality of the Portfolio (the majority of its holdings are not rated by any rating agency) and uncertainty related to the potential reduction in income earned on the Portfolio because of the impending taxation of Canadian income trusts.

The redemption date for the Preferred Securities is March 31, 2015.

Notes:
All currency 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.