DBRS Confirms R Split III Corp. Class B Preferred Shares, Series 1 at Pfd-2

DBRS has today confirmed the rating of the Class B Preferred Shares, Series 1 (the Preferred Shares), issued by R Split III Corp. (the Company) at Pfd-2. Approximately 1.23 million Preferred Shares were issued at $13.60 each on May 31, 2012, following the redemption of the Class A Preferred Shares in accordance with their original terms as part of a share capital reorganization. The final redemption date for the Preferred Shares is May 31, 2017.

The net proceeds from the issuance of the Preferred Shares were used by the Company to purchase common shares (the Portfolio) of Royal Bank of Canada (RBC; rated AA with a Stable trend by DBRS). Dividends received from the Portfolio are used to pay a fixed cumulative quarterly distribution to the holders of the Preferred Shares, yielding 4.25% annually on the initial issue price. Holders of the Capital Shares are expected to receive all excess dividend income after the Preferred Share distributions and other expenses of the Company have been paid.

On September 24, 2013, DBRS upgraded the ratings on the Preferred Shares to Pfd-2 from Pfd-2 (low) based on the increased downside protection levels available to holders of the Preferred Shares over the prior year, as well as the increase in distribution coverage ratio. Since the rating was upgraded, the net asset value of the Company has generally been increasing steadily, rising from $43.55 on September 12, 2013, to $54.22 on September 11, 2014. Downside protection available to holders of the Preferred Shares increased to 74.9% as of September 11, 2014, compared to 68.8% on September 12, 2013. In addition, RBC raised its dividends twice this year, on February 26, 2014, and most recently on August 22, 2014, increasing quarterly distributions to 75 cents per share from 67 cents per share. This dividend boost increases the Preferred Share distribution coverage ratio to 2.9 times (up from 2.6 times in September 2013). The confirmation of the rating of the Preferred Shares is based primarily on the current level of downside protection available and the current distribution coverage ratio.

The main constraints to the rating are the following:

(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 RBC may result in significant reductions in downside protection from time to time.

(3) The concentration of the entire Portfolio in the common shares of RBC.

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 2014), which can be found on our website under Methodologies.