DBRS Confirms BAM Split Corp. Class AA Preferred Shares Series 1, 3, 4, and 5 at Pfd-2 (low)

DBRS has today confirmed the ratings of Pfd-2 (low) on the Class AA Preferred Shares, Series 1 (the Series 1 Preferred Shares), Class AA Preferred Shares, Series 3 (the Series 3 Preferred Shares), Class AA Preferred Shares, Series 4 (the Series 4 Preferred Shares), and the Class AA Preferred Shares, Series 5 (the Series 5 Preferred Shares) issued by BAM Split Corp. (the Company). The Series 1 Preferred Shares, Series 3 Preferred Shares, Series 4 Preferred Shares and Series 5 Preferred Shares are collectively referred to as the Class AA Preferred Shares.

The Company owns a portfolio (the Portfolio) of Class A Limited Voting Shares (the BAM Shares) of Brookfield Asset Management Inc. (BAM). Dividends received from the Portfolio will be used to fund the payment of dividends on the various series of Class AA Preferred Shares. Any capital appreciation of the BAM Shares will benefit the holders of the Capital Shares. All series of Class AA Preferred Shares rank senior to the Capital Shares and pari passu with all other Class AA Preferred Shares with respect to payment of dividends and repayment of principal. Holders of the Capital Shares of the Company are expected to receive all excess dividend income after Class AA Preferred Shares distributions and other Company expenses have been paid.

The downside protection available to the Class AA Preferred Shares is approximately 66.0%, based on the market value of the BAM Shares as of November 25, 2011. The dividend coverage ratio is approximately 1.1 times. As a result, the Company will initially be able to fund the Class AA Preferred Shares distributions without relying on other methods for generating income or reverting to the sale of common shares in the Portfolio. In the event of a shortfall, the Company will sell some of the BAM Shares or write covered call options to generate sufficient income to satisfy its obligations to pay the Class AA Preferred Shares dividends.

The Pfd-2 (low) ratings of the Class AA Preferred Shares are primarily based on the downside protection and dividend coverage available to the Class AA Preferred Shares.

The main constraints to the ratings are the following:

(1) The downside protection available to holders of the Class AA Preferred Shares depends solely on the market value of the BAM Shares held in the Portfolio, which will fluctuate over time.

(2) There is a lack of diversification as the Portfolio is entirely made up of BAM Shares.

(3) Changes in the dividend policy of BAM may result in reductions in Class AA Preferred Shares dividend coverage.

(4) As the BAM Shares pay dividends in U.S. dollars, the Company is exposed to foreign currency risk relating to the Canadian-U.S. exchange rate – specifically, the appreciation of the Canadian dollar versus the U.S. dollar – which may have a negative impact on the dividend coverage ratio of the Class AA Preferred Shares as these dividends are paid in Canadian dollars.

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.