DBRS Upgrades BNS Split Corp. II Class B Preferred Shares, Series 1 to Pfd-2 from Pfd-2 (low)

DBRS has today upgraded the rating of the Class B Preferred Shares, Series 1 (the Class B Preferred Shares) issued by BNS Split Corp. II (the Company) to Pfd-2 from Pfd-2 (low). The Class B Preferred Shares were issued in September 2010, following a reorganization of the Company. The Company used the proceeds from the initial share issuance of Class A Preferred Shares and Class A Capital Shares to purchase a portfolio of common shares of Bank of Nova Scotia (currently rated AA by DBRS).

The dividends received from the Portfolio are used to pay a fixed cumulative quarterly distribution of $0.2003 per share to holders of the Class B Preferred Shares, yielding approximately 4.25% annually on the initial issue price of $18.85. The current yield on the Portfolio shares fully covers the Class B Preferred Share dividends, providing dividend coverage (net of expenses) of approximately 2.4 times. The Class A Capital Shares receive all excess dividend income after the Class B Preferred Share distributions and other expenses of the Company have been paid.

The performance of the Company has been positive since the last rating action. Downside protection increased steadily to 67.5% on April 10, 2014, from 63.9% on August 1, 2013, while increases in dividend distributions from underlying banks helped boost the dividend coverage ratio. As a result, the rating of the Class B Preferred Shares has been upgraded to Pfd-2 from Pfd-2 (low).

The main constraints to the rating are the following:

(1) The downside protection provided to holders of the Class B Preferred Shares is dependent on the value of the common shares of Bank of Nova Scotia.

(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 entire Portfolio is concentrated in the common shares of Bank of Nova Scotia.

The Class B Preferred Shares will be redeemed by the Company on September 22, 2015.

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 (July 2013), which can be found on our website under Methodologies.