DBRS Confirms 5Banc Split Inc. Class C Preferred Shares, Series 1 at Pfd-2 (low)

DBRS has today confirmed the rating of the Class C Preferred Shares, Series 1 (the Preferred Shares) issued by 5Banc Split Inc. (the Company) at Pfd-2 (low). Approximately 2.58 million Preferred Shares were issued at $10 each on December 15, 2011, following the redemption of the Class B Preferred Shares in accordance with their original terms as part of a share capital reorganization. The final redemption date for the Preferred Shares is December 15, 2016.

The net proceeds from the offering were used toward funding the redemption of the Class B Preferred Shares and the retraction of the Class B Capital Shares (the Capital Shares) under the Special Retraction Right for those holders who did not want to extend their investment in the Company. The Company holds a portfolio of common shares of the top five Canadian chartered banks (the Portfolio): Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank, all five of which are rated AA with a Stable trend by DBRS. After accounting for the Reorganization, the Portfolio was initially rebalanced to an equal weight position among the five banks and is not actively traded.

The Preferred Shares pay a quarterly fixed, cumulative, preferential distribution of $0.11875 per Preferred Share yielding 4.75% per annum on their initial issue price. Based on the current dividend yields on the underlying banks, the Preferred Share dividend coverage ratio is approximately 2.0 times. Holders of the Capital Shares are expected to receive all excess dividend income after the Preferred Share distributions and other expenses of the Company have been paid.

Since the rating was assigned in December 2011, performance has been generally positive, with the net asset value of the Company fluctuating between $23 and $26. The downside protection available to holders of the Preferred Shares as of December 6, 2012, is 61.5%. The confirmation of the rating of the Preferred Shares is based primarily on the level of downside protection and dividend coverage available, as well as on the high credit quality and consistency of dividend distributions on the underlying names in the Portfolio.

The main constraints to the rating are the following:

(1) The downside protection provided to holders of the Preferred Shares is dependent on the value of the shares in the Portfolio.
(2) Volatility of price and changes in the dividend policies of the Canadian banks may result in significant reductions in downside protection from time to time.
(3) The concentration of the entire Portfolio is in the Canadian financial services industry.

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

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.

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