DBRS Downgrades Financial 15 Split Corp. II Preferred Shares to Pfd-4 (high) from Pfd-3 (low)

DBRS has today downgraded the rating of the Preferred Shares issued by Financial 15 Split Corp. II (the Company) to Pfd-4 (high) from Pfd-3 (low).

In September 2004, the Company issued 6.4 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). Although these shares were offered separately, together they form a Unit. The redemption date for both classes of shares issued was initially December 1, 2009, but was extended to December 1, 2014, at a special meeting of shareholders in April 2007.

The Company holds a portfolio consisting primarily of common shares of 15 high-quality North American financial services companies: Bank of America Corporation, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, CI Financial Corp., Citigroup Inc., The Goldman Sachs Group Inc., Great-West Lifeco Inc., JP Morgan Chase & Co., Manulife Financial Corporation, National Bank of Canada, Royal Bank of Canada, Sun Life Financial Inc., Toronto-Dominion Bank and Wells Fargo & Company (collectively, the Portfolio Companies). Up to 15% of the net asset value (NAV) of the Company may be invested in securities of issuers other than those mentioned above, and no more than 10% of the NAV of the Company may be invested in any single issuer. The Portfolio is actively managed by Quadravest Capital Management Inc.

The Preferred Shares pay a fixed cumulative monthly dividend of $0.04375 per Preferred Share, yielding 5.25% annually on their issue price of $10 per share. Holders of the Class A Shares are expected to receive regular monthly targeted cash distributions of $0.10 per Class A Share, yielding 8% annually on their issue price of $15 per share. However, these Class A Share distributions have been suspended as of April 2011 due to the NAV per Unit falling below the $15 threshold. In addition, no special year-end dividends will be paid if, after such payment, the NAV of the Portfolio would be less than $25.

On September 6, 2011, DBRS confirmed the ratings on the Preferred Shares at Pfd-3 (low) due to the fairly stable level of downside protection available to holders of the Preferred Shares, despite the NAV and downside protection decreasing gradually in the months leading up to the confirmation. However, the downside protection continued to decline after the rating confirmation until the beginning of the first quarter of 2012. From January to March 2012, the NAV has experienced some recovery, but the downside protection has not increased significantly enough over the past few months to offset its previous underperformance. Furthermore, the downside protection declined again in April to 26.1% due to the negative performance of most financial institutions in the Portfolio. The dividend coverage ratio is currently around 0.56, which results in a grind on the Portfolio. As a result, the rating has been downgraded to Pfd-4 (high).

The scheduled final maturity date of the Preferred Shares is December 1, 2014. DBRS will continue to closely monitor changes in the credit quality 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.