DBRS Confirms Brompton Lifeco Split Corp. Preferred Shares at Pfd-5 (high)

DBRS has today confirmed the rating of the Preferred Shares issued by Brompton Lifeco Split Corp. (the Company) at Pfd-5 (high). In April 2007, the Company issued 3.1 million Preferred Shares (at $10 each), along with an equal number of Class A Shares (at $15 each). The termination date for both classes of shares issued is April 30, 2014.

The Company holds a portfolio consisting primarily of common shares of the four largest publicly traded Canadian life insurance companies (the Portfolio). As of March 28, 2013, the Portfolio’s composition was: Industrial Alliance Insurance and Financial Services Inc. (26.1%), Sun Life Financial Inc. (24.5%), Great-West Lifeco Inc. (24.4%) and Manulife Financial Corporation (24.0%). The Portfolio was initially equally weighted and is subject to annual rebalancing.

The Preferred Shares pay a fixed cumulative quarterly distribution of $0.13125 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 $0.075 per share, yielding 6% annually on their issue price of $15 per share. However, Class A Share distributions have been suspended since February 28, 2011, due to the net asset value (NAV) of the Company falling below $15 per unit (i.e., 33% downside protection). In addition, no special distributions will be paid if, after such payment, the NAV of the Company would be less than $25 per unit.

On October 25, 2012, DBRS downgraded the ratings of the Preferred Shares to Pfd-5 (high) from
Pfd-4 (low), due to the volatility in the NAV of the Company and the insufficient levels of downside protection in the months leading up to the rating action. Since then, the NAV of the Company has recovered, with downside protection available to holders of the Preferred Shares reaching 32.2% as of May 30, 2013. However, the Preferred Share dividend coverage ratio is rather low at 0.6 times and there is less than one year remaining until the Preferred Shares mature. While Canadian life insurance companies have recovered, the industry as a whole continues to experience stress as interest rates remain at all-time lows. As a result, the rating of the Preferred Shares has been confirmed at Pfd-5 (high).

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 (August 2012), which can be found on our website under Methodologies.