DBRS Confirms Brookfield Soundvest Split Trust Preferred Securities at Pfd-4 (low)

DBRS has today confirmed the rating of Pfd-4 (low) on the Preferred Securities issued by Brookfield Soundvest Split Trust (the Trust).

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 was reinstated in February 2011 at $0.04 annually after being suspended in October 2008, but was suspended again in August 2011 due to 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 (REITs), 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, 2011, the Portfolio consisted of 76% Canadian common stock, 19% REITs, and 5% power generation and pipeline trusts, which differs significantly from its 2010 holdings as a result of most income trusts having been converted to corporations due to the previously mentioned change in tax laws. Although the conversion from income trusts to corporations has decreased the dividend yield earned on the Portfolio, the Portfolio generated yield remains sufficient to cover the dividend distribution on the Preferred Securities.

Despite a deterioration in the Portfolio metrics since the previous rating review, specifically with respect to the Preferred Security downside protection (currently at 23.9%, down from 30.6% since December 31, 2010) and dividend yield, DBRS remains comfortable with the current assessment of the Portfolio and the confirmation of the Pfd-4 (low) rating. DBRS will continue to monitor the performance of Brookfield Soundvest Split Trust to determine the required level of downside protection for the assigned rating, and take appropriate action as needed.

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

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.