DBRS Confirms Brookfield Soundvest Split Trust Preferred Securities at Pfd-4 (low)

DBRS has today confirmed the rating of Pfd-4 (low) on the Preferred Securities issued by Brookfield Soundvest Split Trust (the Trust).

In March 2005, the Trust raised gross proceeds of $180 million by issuing 7.2 million Preferred Securities (at $10 each) and an equal number of Capital Units (at $15 each). The net proceeds from the initial offering were invested in a diversified portfolio of Canadian income trusts (the Portfolio). Holders of the Preferred Securities receive fixed quarterly interest payments yielding 6% annually. The Capital Units are expected to receive regular monthly cash distributions, subject to the Preferred Security asset coverage ratio being greater than 1.4 times. The Capital Unit distribution was reinstated in February 2011 at $0.04 annually after being suspended in October 2008, but was suspended again in August 2011 due to failure of the asset coverage test.

On April 20, 2010, at an extraordinary meeting of the capital unitholders of the Trust, a reorganization of the Trust was approved. As part of the reorganization, the Trust’s investment strategy and restrictions were amended to broaden the universe of eligible investments and increase flexibility in the management of the Trust. The changes were made in anticipation of the impending change in the taxation of income trusts in Canada, starting January 1, 2011. Prior to the amendments, there were permitted ranges for various types of income trusts, which were eliminated as part of the reorganization. Eligible investments of the Trust now include common shares and preferred shares, income trusts, income securities (including bonds and debentures), real estate investment trusts (REITs), Canadian mortgage-backed securities and other equity securities. In addition, the manager of the Trust was changed from Brookfield Investment Management to Brookfield Soundvest Capital Management Ltd., and the Trust’s name was changed from Brascan SoundVest Rising Distribution Split Trust to Brookfield Soundvest Split Trust.

As of September 30, 2012, the Portfolio consisted of 68% Canadian common stock, 22% REITs, 6% power generation and pipeline trusts and 3% Canadian preferred stock. Since the rating was last confirmed in December 2011, performance has been slightly negative. Downside protection available to holders of the Preferred Securities has slowly trended lower over the past year, falling from 23.9% on November 30, 2011, to 17.4% as of November 30, 2012. The yield on the Portfolio has also decreased slightly, causing the distribution coverage ratio to drop to 0.8 times (as of November 30, 2012). Despite the reduction, downside protection remains at levels sufficient for a Pfd-4 (low) rating. The rating on the Preferred Securities continues to be constrained by the large percentage of underlying securities in the Portfolio that are not rated by any rating agency and the grind on the Portfolio due to distributions exceeding income.

The redemption date for the Preferred Securities is March 31, 2015.

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.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.