DBRS Confirms 5Banc Split Inc. Class C Preferred Shares, Series 1 at Pfd-2, Removed from Under Review with Developing Implications

DBRS Limited (DBRS) has today confirmed the rating of the Class C Preferred Shares, Series 1 (the Class C Preferred Shares), issued by 5Banc Split Inc. (the Company) at Pfd-2, and removed it from Under Review with Developing Implications.

On December 15, 2011, approximately 2.58 million Preferred Shares were issued at $10 each following the redemption of the Class B Preferred Shares, in accordance with their original terms, as part of a share capital reorganization. The final redemption date for the Preferred Shares is December 15, 2016.

The net proceeds from the offering were used to fund the redemption of the Class B Preferred Shares and the retraction of the Class B Capital Shares (the Capital Shares) under the Special Retraction Right for those holders who did not want to extend their investment in the Company. The Company holds a portfolio of common shares of the top five Canadian chartered banks (the Portfolio): Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank, all five of which are rated AA by DBRS. After accounting for the reorganization, the Portfolio was initially rebalanced to an equally weighted position among the five banks and is not actively traded.

The Preferred Shares pay a quarterly fixed, cumulative, preferential distribution of $0.11875 per Preferred Share yielding 4.75% per annum on their initial issue price. Based on the current dividend yields on the underlying banks, the Preferred Share dividend coverage ratio is approximately 2.2 times. 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 August 22, 2014, shareholders of 5Banc Split Inc. approved the proposed change in the administrator and investment manager of the Company to Timbercreek Asset Management Ltd. (Timbercreek) from TD Securities. The transaction closed and became effective on September 19, 2014.

On October 17, 2014, DBRS placed 5Banc Split Inc. Under Review with Developing Implications, due to the change in administrator and investment manager. The rating action reflected the fact that DBRS takes into consideration the quality of investment manager and/or administrator of the portfolio. Due diligence had to be conducted to determine whether the change will be material to the ratings of the Funds. More information regarding the characteristics that DBRS considered in this process can be found in the applicable methodology.

After conducting due diligence on Timbercreek, DBRS determined that the change in administrator and investment manager will not have a material impact on the rating of the Company. The Company’s performance has generally been positive, with the net asset value of the Company increasing to $35.17 as of November 15, 2014. Downside protection available to holders of the Class C Preferred Shares rose to 71.6% as of November 2014, compared with 68.6.2% in April 2014. 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 Preferred Shares is dependent on the value of the shares in the Portfolio.

(2) Price volatility and changes in the dividend policies of the Canadian banks may result in significant reductions in downside protection from time to time.

(3) The concentration of the entire Portfolio is in the Canadian financial services industry

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, which can be found on our web site under Methodologies.