DBRS Confirms AllBanc Split Corp. Class B Preferred Shares at Pfd-2 (low)

DBRS has today confirmed the rating of the Class B Preferred Shares (the Preferred Shares) issued by AllBanc Split Corp. (the Company) at Pfd-2 (low). The Preferred Shares were issued in March 2008 following a reorganization of the Company.

The net proceeds of the Company’s initial offering and reorganization are invested in a portfolio of common shares of the five biggest Canadian banks (the Portfolio): Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank. The Portfolio was initially equally weighted among the five banks and is not actively traded.

Dividends received on the Portfolio are used to pay a quarterly fixed cumulative preferential distribution of $0.3344 per Preferred Share, yielding approximately 5.0% annually on the Preferred Share par value of $26.75. Based on the current dividend yields on the underlying banks, the Preferred Share dividend coverage is approximately 1.5 times. As a result, the Preferred Share dividends are currently funded entirely from dividends received on the Portfolio.

On October 5, 2010, the Company closed a warrant offering, issuing one warrant for each Class A Capital Share (Capital Share), which entitles the holder to purchase one Unit (one Capital Share and one Preferred Share) for a subscription price of $62.78 per Unit on any date prior to June 7, 2011. Since October 5, the net asset value (NAV) of the Company has increased by more than 5%, so the warrants are currently in-the-money. The current downside protection (as of February 24, 2011) is approximately 58%, based on the dilutive NAV, which takes into account the warrants outstanding.

The confirmation of the Pfd-2 (low) rating of the Preferred Shares is based primarily on the downside protection and dividend coverage available, as well as on the strong credit quality and consistency of dividend distributions of the Portfolio holdings. Since the rating was last confirmed, in August 2010, the NAV of the Company has increased by approximately 9%.

The main constraints to the rating are the following:

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

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

(3) The Portfolio is entirely concentrated in the Canadian financial services industry.

The Preferred Shares will be fully redeemed by the Company on March 8, 2013.

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.