DBRS Upgrades Utility Split Trust Class B Preferred Securities to Pfd-2 from Pfd-2 (low)

DBRS has today upgraded the rating of the Class B Preferred Securities issued by Utility Split Trust (the Fund) to Pfd-2 from Pfd-2 (low). Approximately 1.2 million Class B Preferred Securities were issued on December 19, 2011, following the redemption of the previously outstanding Preferred Securities in accordance with their original terms as part of a share capital reorganization. The final redemption date for the Class B Preferred Securities is December 31, 2016.

The net proceeds from the issuance of the Class B Preferred Securities, after paying all expenses, issuance costs and redeeming all previously outstanding Preferred Securities, were used by the Fund to acquire additional securities in the Fund’s portfolio (the Portfolio) in accordance with the Fund’s investment objectives, strategy and restrictions. The Fund holds a portfolio of utility issuers that consist of corporations or income trusts that generate, transmit and/or distribute electricity, water and/or natural gas, including those that supply raw materials for the generation of electricity. The Portfolio is actively managed by First Asset Investment Management Inc.
Dividends received on the Portfolio are used by the Fund to make quarterly fixed cumulative distributions of $0.13125 per Class B Preferred Security to yield 5.25% annually on the initial $10 issue price. Based on the current dividend yields on the underlying portfolio entities, the dividend coverage ratio (net of expenses) is approximately 0.77 times. Shortfalls are expected to be funded through the sale of portfolio securities or drawing upon a loan facility. Holders of the Capital Units are currently receiving $0.05 per unit each month after the Class B Preferred Securities distributions and other expenses of the Fund have been paid.

Since the rating was confirmed in December 2013, Fund performance has been steadily improving. The net asset value (NAV) of the Fund has increased to $29.54 from $26.32,, with downside protection available to holders of the Class B Preferred Securities increasing to approximately 66.2%. From time to time the Portfolio has had a large cash and cash equivalents position that has decreased the income received by the Fund, resulting in a grind on the Portfolio. The Pfd-2 rating of the Class B Preferred Securities is based primarily on the downside protection available, as well as on the measures in place to protect the distributions to and repayment of the Class B Preferred Securities (i.e., the Class B Preferred Security Test, which does not permit any distributions to the Capital Unit holders if the NAV of the Portfolio is less than 1.5 times the outstanding principal amount for the Class B Preferred Securities).

The main constraints to the rating are the following:

(1) The downside protection available to holders of the Class B Preferred Securities is dependent on the value of the underlying securities held in the Fund, which are determined by supply and demand factors for utility issuers.

(2) A majority of the Portfolio is concentrated in the utility and energy sector.

(3) Income received on the Portfolio is currently unable to fully cover distributions to holders of the Preferred Securities.

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.