DBRS Downgrades Brompton Lifeco Split Corp. Preferred Shares to Pfd-5 (high) from Pfd-4 (low)

DBRS has today downgraded the rating of the Preferred Shares issued by Brompton Lifeco Split Corp. (the Company) to Pfd-5 (high) from Pfd-4 (low).

In April 2007, the Company issued 3.1 million Preferred Shares (at $10 each), along with an equal number of Class A Shares (at $15 each). The termination date for both classes of shares issued is April 30, 2014.

The Company holds a portfolio consisting primarily of common shares of the four largest publicly traded Canadian life insurance companies (the Portfolio). As of September 30, 2012, the Portfolio’s composition was: Sun Life Financial Inc. (25.6%), Great-West Lifeco Inc. (24.9%), Industrial Alliance Insurance and Financial Services Inc. (24.5%) and Manulife Financial Corporation (23.6%). The Portfolio was initially equally weighted and is subject to annual rebalancing.

The Preferred Shares pay a fixed cumulative quarterly distribution of $0.13125 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 $0.075 per share, yielding 6% annually on their issue price of $15 per share. However, Class A Share distributions have been suspended since February 28, 2011, due to the net asset value (NAV) of the Company falling below $15 per unit (i.e., 33% downside protection). In addition, no special distributions will be paid if, after such payment, the NAV of the Company would be less than $25 per unit.

On March 20, 2012, DBRS downgraded the ratings of the Preferred Shares to Pfd-4 (low) from Pfd-4 (high), due to the considerable drop in downside protection available to holders of the Preferred Shares. Since the rating downgrade, the NAV of the Company has been volatile, causing downside protection to fluctuate widely between -4.9% and 18.3%. The downside protection available to the Preferred Shares was 8.2% as of October 11, 2012, and the current Preferred Shares distribution coverage ratio is approximately 0.7 times. As a result of the downside protection falling and remaining below acceptable levels for a prolonged period, along with the insufficient distribution coverage ratio on the Portfolio, the rating has been further downgraded to Pfd-5 (high).

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.