DBRS Confirms Big 8 Split Inc. Class D Preferred Shares, Series 1 at Pfd-2 (low), Removed From Under Review with Developing Implications

DBRS Limited (DBRS) has today confirmed the rating of the Class D Preferred Shares, Series 1 (the Class D Preferred Shares), issued by Big 8 Split Inc. (the Company) at Pfd-2 (low), and removed it from Under Review with Developing Implications.

On December 13, 2013, approximately 1.72 million Class D Preferred Shares and 1.72 million Class D Capital Shares were issued. The net proceeds from the offering were used to fund the redemption of approximately 0.59 million Class B Preferred Shares, 0.65 million Class C Preferred Shares, and 1.2 million Class A Capital shares as part of a share capital reorganization. The final redemption date for the Class D Preferred Shares is December 15, 2018.

The Company holds a portfolio of common shares of the top five Canadian chartered banks and three life insurance companies: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Toronto-Dominion Bank, Sun Life Financial Inc., Manulife Financial Corporation and Great-West Lifeco Inc. After accounting for the reorganization, the Portfolio was initially rebalanced to an equally weighted position and is not actively traded.

The Preferred Shares pay a quarterly fixed, cumulative, preferential distribution of $0.1125 per Preferred Share yielding 4.50% 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 1.6 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 Big 8 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 Big 8 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 (NAV) of the Company increasing to $24.11 as of November 15, 2014 with downside protection available to holders of the Class D Preferred Shares of 58.5%. As a result, the rating of the Class D Preferred Shares has been confirmed at Pfd-2 (low).

The main constraints to the rating are the following:

(1) The downside protection available to holders of the Class D Preferred Shares will depend on the value of the common shares held in the Portfolio.

(2) The Portfolio is entirely concentrated in the Canadian financial services industry, which has often experienced greater common share price volatility than other industries in the past.

(3) Changes in dividend policies of the banks and insurance companies included in the Portfolio may result in reductions in Class D Preferred Share dividend coverage or downside protection from time to time.

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.