DBRS Confirms Big 8 Split Inc. Preferred Shares at Pfd-2

DBRS has today confirmed the ratings of Pfd-2 assigned to the Class B Preferred Shares, Series 1 (the Class B Preferred Shares) and the Class C Preferred Shares, Series 1 (the Class C Preferred Shares) issued by Big 8 Split Inc. (the Company). The Class B Preferred Shares and Class C Preferred Shares are collectively referred to as the Preferred Shares. Downside protection to the Preferred Shares is provided by the Class A Capital Shares (the Capital Shares), which were issued in conjunction with the Preferred Shares. There are an equal number of Preferred Shares and Capital Shares outstanding.

The Company has used net proceeds from the issuance of the Preferred Shares and Capital Shares to invest in a portfolio (the Portfolio) consisting of common shares of Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Toronto-Dominion Bank, Great-West Lifeco Inc., Manulife Financial Corporation and Sun Life Financial Inc.

The Class B Preferred Shares and Class C Preferred Shares yield 7.00% and 5.75% annually, respectively, on their issue price of $12 per Preferred Share and rank pari passu with respect to return of principal and payment of dividends. Holders of the Capital Shares are expected to receive all excess dividend income after Preferred Share distributions and other Company expenses have been paid.

On December 9, 2010, DBRS confirmed the ratings on the Preferred Shares at Pfd-2. However since that time, the net asset value and downside protection available to the Preferred Shares has declined due to general market instability. This decline has affected several sectors, including the financial services industry, which is the primary investment sector for Big 8 Split Inc. Downside protection has decreased to 56.7% from 62.6% since December 2010 (the S&P/TSX Composite Bank Index declined 5.9% and the S&P/TSX Composite Insurance Index declined 18.8% over the same period). In addition, based on the current dividend yield on the Portfolio, the current Preferred Share dividend coverage ratio is approximately 1.5 times. Despite the recent downturn, DBRS remains comfortable confirming the current Pfd-2 ratings of the Preferred Shares, primarily because of the sufficient level of downside protection and dividend coverage available in the transaction, as well as the credit quality and consistency of dividend distributions of the Portfolio holdings.

The main constraints to the ratings are the following:

(1) The downside protection available to holders of the Preferred Shares depends on the value of the common shares held by the Portfolio.

(2) The Portfolio is entirely concentrated in the Canadian financial services industry, which has often experienced greater common share price volatility than other industries in the past.

(3) Changes in dividend policies of the banks and insurance companies included in the Portfolio may result in reductions in Preferred Share dividend coverage or downside protection from time to time.

The scheduled final maturity date of the Preferred Shares is December 15, 2013.

DBRS will monitor the status of the Preferred Shares and provide rating updates as required.

Note:
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.