DBRS Confirms TD Split Inc. Class C Preferred Shares, Series 1 at Pfd-2

DBRS has today confirmed the rating of the Class C Preferred Shares, Series 1 (the Class C Preferred Shares), issued by TD Split Inc. (the Company) at Pfd-2.

On November 15, 2010, the Class B Preferred Shares and the Class B Capital Shares issued by the Company were redeemed in accordance with their original terms. The Company then issued 3.12 million Class C Preferred Shares, at $10 each, and an equal number of Class C Capital Shares, Series 1 (the Class C Capital Shares), at $18 each, in order to maintain the leveraged split share structure of the Company. The final redemption date for the Class C Preferred Shares and the Class C Capital Shares is November 15, 2015.

The net proceeds from the issuance of the Class C Preferred Shares and Class C Capital Shares were used by the Company to purchase common shares (the Portfolio) of The Toronto-Dominion Bank (TD). Dividends received from the Portfolio are used to pay a fixed cumulative quarterly distribution to holders of the Class C Preferred Shares, yielding 4.75% annually on the initial issue price. Based on the current dividend yield of TD, the Preferred Share coverage ratio is 2.1 times. After the Class C Preferred Share dividends and Company expenses have been paid, holders of the Class C Capital Shares are expected to receive all remaining net income of the Company.

On October 18, 2012, DBRS upgraded the ratings on the Class C Preferred Shares to Pfd-2 from Pfd-2 (low), due to a steady increase in downside protection in the months leading up to the rating action, as well as a greatly improved dividend coverage ratio. Since then, performance has been generally positive, with the net asset value (NAV) of the Company fluctuating around $30.00 before increasing to $33.51 as of October 10, 2013. Downside protection available to holders of the Class C Preferred Shares increased to 70.2% as of October 2013, compared with 66.1% in October 2012. As a result, the rating of the Class C Preferred Shares has been confirmed at Pfd-2.

The main constraints to the rating are the following:

(1) The downside protection provided to holders of the Class C Preferred Shares is dependent on the value of the shares in the Portfolio.

(2) Volatility of price and changes in the dividend policies of TD 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 common shares of TD.

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.