DBRS Confirms Big Bank Big Oil Split Corp.’s Preferred Shares at Pfd-2 (low)

DBRS has today confirmed the rating of the Class A, Preferred Shares (the Preferred Shares) issued by Big Bank Big Oil Split Corp. (the Company) at Pfd-2 (low) and has removed the rating from Under Review with Negative Implications. In June 2006, the Company issued 2.72 million Preferred Shares at $10 each and an equal number of Capital Shares (the Capital Shares) at $15 each. The original final redemption date for both classes of shares was December 30, 2011; however, the final redemption date was extended five years to December 30, 2016, at a special meeting of shareholders on May 18, 2010.

The net proceeds from the offering were used to purchase a portfolio of common shares of the six largest banks and several of the largest oil and gas companies in Canada (collectively, the Portfolio). The Portfolio was initially equally weighted and is rebalanced annually. Dividends received on the Portfolio are used to pay a fixed cumulative quarterly distribution to holders of the Preferred Shares, yielding 5.25% annually on the initial issue price. Holders of the Capital Shares have been receiving monthly distributions of $0.09 per Capital Share since February 2011.

On September 6, 2012, DBRS placed the rating of the Preferred Shares Under Review with Negative Implications, primarily due to the drop in downside protection below required levels in the prior months. However, since then, downside protection has recovered and stabilized, fluctuating between 49% and 51%, and the dividend coverage ratio has improved. As a result, the Preferred Shares have been confirmed at Pfd-2 (low) and removed from Under Review with Negative Implications.

The main constraints on the rating are as follows:

(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 underlying companies in the Portfolio may result in significant reductions in downside protection or dividend coverage from time to time.

(3) The concentration of the entire Portfolio is in the Canadian banking and energy 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.