DBRS Confirms BAM Split Corp. Class AA Preferred Shares Series 1, 3, 4, and 5 at Pfd-2 (low)

DBRS has today confirmed the ratings of Pfd-2 (low) on the Class AA Preferred Shares, Series 1 (the Series 1 Preferred Shares), Class AA Preferred Shares, Series 3 (the Series 3 Preferred Shares), Class AA Preferred Shares, Series 4 (the Series 4 Preferred Shares), and the Class AA Preferred Shares, Series 5 (the Series 5 Preferred Shares) issued by BAM Split Corp. (the Company). The Series 1 Preferred Shares, Series 3 Preferred Shares, Series 4 Preferred Shares and Series 5 Preferred Shares are collectively referred to as the Class AA Preferred Shares.

On January 31, 2012, the Company completed the issuance of $200 million Junior Preferred Shares, Series 1 (the Junior Preferred Shares; collectively with the Class AA Preferred Shares, the Preferred Shares) by exchanging each outstanding Capital Share into 1.4058 Capital Shares and 0.4058 Junior Preferred Shares. The Junior Preferred Shares (not rated by DBRS) rank junior to the Class AA Preferred Shares and senior to the Capital Shares in terms of final repayment and dividend distributions. Holders of the Junior Preferred Shares are entitled to receive quarterly non-cumulative cash distributions yielding 5.0% per annum on the initial issue price of $25 at the discretion of the Board of Directors. A distribution of $2.5 million was paid to holders of the Junior Preferred Shares on September 28, 2012, and no other Junior Preferred Share distributions have been declared since then. Although the net asset value (NAV) per Unit of the Company (each Unit composed of one Capital Share and either one Class AA Preferred Share or one Junior Preferred Share) decreased after the exchange due to the increase in the number Units outstanding, the Junior Preferred Shares provide subordination to the Class AA Preferred Shares, so their issuance did not adversely affect the downside protection available to holders of the Class AA Preferred Shares.

The Company owns a portfolio (the Portfolio) of Class A Limited Voting Shares (the BAM Shares) of Brookfield Asset Management Inc. (BAM). Dividends received from the Portfolio will be used to fund the payment of dividends on the Class AA Preferred Shares. Any capital appreciation of the BAM Shares will benefit the holders of the Capital Shares. All series of Class AA Preferred Shares rank senior to the Junior Preferred Shares and Capital Shares and pari passu with all other Class AA Preferred Shares with respect to payment of dividends and repayment of principal. Holders of the Capital Shares of the Company will only receive excess dividend income after Class AA Preferred Shares distributions, Junior Preferred Share distributions and other Company expenses have been paid.

The downside protection available to the Class AA Preferred Shares is approximately 73%, based on the market value of the BAM Shares as of November 30, 2012. The current Class AA Preferred Share dividend coverage ratio is approximately 1.1 times. As a result, the Company continues to be able to fund the Class AA Preferred Shares distributions without relying on other methods for generating income or reverting to the sale of common shares in the Portfolio. In the event of a shortfall, the Company may sell some of the BAM Shares, engage in securities lending or write covered call options to generate sufficient income to satisfy its obligations to pay the Class AA Preferred Shares dividends.

The Pfd-2 (low) ratings of the Class AA Preferred Shares are primarily based on the downside protection and dividend coverage available to the Class AA Preferred Shares.

The main constraints to the ratings are the following:

(1) The downside protection available to holders of the Class AA Preferred Shares depends solely on the market value of the BAM Shares held in the Portfolio, which will fluctuate over time.

(2) There is a lack of diversification as the Portfolio is entirely made up of BAM Shares.

(3) Changes in the dividend policy of BAM may result in reductions in Class AA Preferred Shares dividend coverage.

(4) As the BAM Shares pay dividends in U.S. dollars, the Company is exposed to foreign currency risk relating to the Canadian-U.S. exchange rate, specifically the appreciation of the Canadian dollar vs. the U.S. dollar. This may have a negative impact on the dividend coverage ratio of the Class AA Preferred Shares as these dividends are paid in Canadian dollars.

(5) Downside protection available to the Class AA Preferred Shares may be negatively affected by the retraction of the Junior Preferred Shares.

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.