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

DBRS has today confirmed the rating of Pfd-2 (low) on the Class C Preferred Shares, Series 1 (the Class C Preferred Shares) issued by TD Split Inc. (the Company).

On November 15, 2010, the Class B Preferred Shares and the Class B Capital Shares issued by the Company were redeemed in accordance with their original terms. The Company then 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). A rating of Pfd-2 (low) was assigned to the Class C Preferred Shares primarily based on the downside protection available (approximately 62% as of November 15, 2010) and the dividend coverage available (approximately 1.5 times as of November 15, 2010), as well as on the credit quality and consistency of dividend distributions of TD.

The current downside protection available to the holders of the Class C Preferred Shares was approximately 64% (as of October 31, 2011). The dividends received from the Portfolio are used to pay a fixed cumulative quarterly distribution to holders of the 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 Class C Preferred Share dividend coverage ratio is approximately 1.77 times.

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 is 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.