DBRS Rates R Split Corp. III Class B Preferred Shares, Series 1 Pfd-2 (low)

DBRS has today assigned a rating of Pfd-2 (low) to the Class B Preferred Shares, Series 1 (the Class B Preferred Shares), issued by R Split Corp. III (the Company), and has also discontinued the rating on the Company’s Class A Preferred Shares, which have been repaid. On March 14, 2012, the Company announced the approval of a share capital reorganization proposal (the Reorganization), which allows holders of the Company’s Class A Capital Shares (the Capital Shares) to extend the term of their investments five years beyond the original May 31, 2012, redemption date. The Class A Preferred Shares were redeemed on May 31, 2012, as originally outlined in their prospectus, and a new series of approximately 1.23 million Class B Preferred Shares have been issued in order to attain the desired leveraged split share structure of the Company.

The net proceeds from the issuance of the Class B Preferred Shares were used by the Company to purchase common shares (the Portfolio) of Royal Bank of Canada (RBC; rated AA, Stable, by DBRS). The initial downside protection available to holders of the Class B Preferred Shares is approximately 62.05%. The dividends received from the Portfolio will be used to pay a fixed cumulative quarterly distribution to the holders of the Class B Preferred Shares, yielding 4.25% annually on the initial issue price. Holders of the Capital Shares are expected to receive all excess dividend income after the Class B Preferred Share distributions and other expenses of the Company have been paid. Based on the current dividend yield on the Portfolio, the initial Class B Preferred Share dividend coverage ratio is approximately 2.29 times.

The Pfd-2 (low) rating of the Class B Preferred Shares is based primarily on the downside protection and dividend coverage available, as well as on the strong credit quality and consistency of dividend distributions of RBC.

The main constraints to the rating are the following:

(1) The downside protection provided to holders of the Class B Preferred Shares is dependent on the value of the shares in the Portfolio.

(2) Volatility of price and changes in the dividend policies of RBC may result in significant reductions in downside protection from time to time.

(3) The concentration of the entire Portfolio in the common shares of RBC.

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.