DBRS Confirms TD 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 TD Split Inc. (the Company) at Pfd-2, and removed it from Under Review with Developing Implications.

On November 15, 2010, the Class B Preferred Shares and the Class B Capital Shares issued by the Company were redeemed in accordance with their original terms. The Company then issued 3.12 million Class C Preferred Shares, at $10 each, and an equal number of Class C Capital Shares, Series 1 (the Class C Capital Shares), at $18 each, in order to maintain the leveraged split share structure of the Company. The final redemption date for the Class C Preferred Shares and the Class C Capital Shares is November 15, 2015.

The net proceeds from the issuance of the Class C Preferred Shares and Class C Capital Shares were used by the Company to purchase common shares (the Portfolio) of The Toronto-Dominion Bank (TD). Dividends received from the Portfolio are used to pay a fixed cumulative quarterly distribution to holders of the Class C Preferred Shares, yielding 4.75% annually on the initial issue price. Based on the current dividend yield of TD, the Preferred Share coverage ratio is 2.0 times. After the Class C Preferred Share dividends and Company expenses have been paid, holders of the Class C Capital Shares are expected to receive all remaining net income of the Company.

On August 22, 2014, shareholders of TD 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 TD 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 performance of the Company has generally been positive since the last annual review, with the net asset value of the Company increasing to $41.13 as of November 15, 2014. Downside protection available to holders of the Class C Preferred Shares increased to 75.7% as of November 2014, compared with 70.2% in October 2013. 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 Class C Preferred Shares is dependent on the value of the shares in the Portfolio.

(2) Volatility of price and changes in the dividend policies of TD may result in significant reductions in downside protection or dividend coverage from time to time.

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

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.