DBRS Confirms Financial 15 Split Corp. Preferred Shares at Pfd-4 (high)

DBRS has today confirmed the rating of the Preferred Shares issued by Financial 15 Split Corp. (the Company) at Pfd-4 (high).

In November 2003, the Company issued 10.6 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). Although these shares were offered separately, together they form a unit. The redemption date for both classes of shares issued was initially December 1, 2008, but was extended to December 1, 2015, at a special meeting of shareholders in July 2008.

The Company holds a portfolio (the Portfolio) consisting primarily of common shares of 15 high-quality North American financial services companies: Bank of America Corporation, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, CI Financial Corp., Citigroup Inc., The Goldman Sachs Group Inc., Great-West Lifeco Inc., JP Morgan Chase & Co., Manulife Financial Corporation, National Bank of Canada, Royal Bank of Canada, Sun Life Financial Inc., Toronto-Dominion Bank and Wells Fargo & Company (collectively, the Portfolio Companies). Up to 15% of the net asset value (NAV) of the Company may be invested in securities of issuers other than those mentioned above. These names include AGF Management Limited and TMX Group Inc. as of August 31, 2012. The common shares of a particular Portfolio Company each represent between 4% and 8% of the total NAV of the Company, and no more than 10% of the NAV of the Company may be invested in any single issuer. The Portfolio is actively managed by Quadravest Capital Management Inc.

The Preferred Shares pay a fixed cumulative monthly dividend of $0.04375 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 $0.1257 per Class A Share, yielding 10% annually on their issue price of $15 per share. However, these Class A Share distributions have been suspended since July 2011 due to the NAV per unit falling below the $15 threshold. In addition, no special year-end dividends will be paid if, after such payment, the NAV of the Portfolio would be less than $25.

On December 29, 2011, DBRS downgraded the rating on the Preferred Shares to Pfd-4 (high) from Pfd-3, mainly due to the decrease of the NAV and downside protection. Over the past year, the performance of the Portfolio experienced some volatility, with the month-end NAV of the Company fluctuating between $18.07 and $19.02 per unit. The current dividend coverage ratio is around 0.66, but the Company has also written covered call options in order to generate additional income for distributions. The rating of Pfd-4 (high) is sufficient based on the current level of downside protection available to the Preferred Shares. As a result, the rating has been confirmed at Pfd-4 (high).

The scheduled final maturity date of the Preferred Shares is December 1, 2015. 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 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, which can be found on our website under Methodologies.