DBRS Upgrades TD Split Inc. Class C Preferred Shares, Series 1 to Pfd-2 from Pfd-2 (low)

DBRS has today upgraded the rating of the Class C Preferred Shares, Series 1 (the Class C Preferred Shares) issued by TD Split Inc. (the Company) to Pfd-2 from Pfd-2 (low).

On November 15, 2010, the Class B Preferred Shares and the Class B Capital Shares issued by the Company were redeemed in accordance with their original terms. The Company then issued 3.12 million Class C Preferred Shares at $10 each and an equal number of Class C Capital Shares, Series 1 (the Class C Capital Shares) at $18 each in order to maintain the leveraged split share structure of the Company. The final redemption date for the Class C Preferred Shares and the Class C Capital Shares is November 15, 2015.

The net proceeds from the issuance of the Class C Preferred Shares and Class C Capital Shares were used by the Company to purchase common shares (the Portfolio) of The Toronto-Dominion Bank (TD). Dividends received from the Portfolio are used to pay a fixed cumulative quarterly distribution to holders of the Class C Preferred Shares, yielding 4.75% annually on the initial issue price. After the Class C Preferred Share dividends and Company expenses have been paid, holders of the Class C Capital Shares are expected to receive all remaining net income of the Company.

On November 21, 2011, DBRS confirmed the ratings on the Class C Preferred Shares at Pfd-2 (low) mainly based on the stable downside protection levels available to holders of the Class C Preferred Shares over the prior year. Since the rating confirmation, the net asset value (NAV) of the Company has been increasing fairly steadily, rising from $25.93 on December 1, 2011, to $29.41 as of October 11, 2012. Downside protection available to the holders of the Class C Preferred Shares increased to approximately 66.0% as of October 11, 2012, from 61.4% on December 1, 2011. In addition, TD raised its dividends on August 30, 2012, increasing quarterly distributions by five cents to 77 cents per share. This dividend boost increases the Class C Preferred Share distribution coverage ratio to 2.0 times. The Class C Preferred Shares are being upgraded mainly due to the increased downside protection available and the improved distribution coverage ratio.

The main constraints to the rating are the following:

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

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

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

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Split Share Companies and Trusts (August 2012), which can be found on our website under Methodologies.