DBRS Confirms Rating of Life & Banc Split Corp. Preferred Shares at Pfd-3 (low)

DBRS Limited (DBRS) has today confirmed the Preferred Shares rating of Life & Banc Split Corp. (the Company) at Pfd-3 (low). On December 3, 2013, the Company announced that it had completed a treasury offering of Class A Shares and Preferred Shares, priced at $10.31 per Class A Share and $10.09 per Preferred Share. Based on the net asset value (NAV) as of November 21, 2013, the offering was determined to be non-dilutive. The scheduled redemption date for both classes of shares issued was originally November 29, 2013, but was extended to November 29, 2018.

The Company holds a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio) issued by the six major Canadian banks and four Canadian life insurance companies. The Portfolio was initially equally weighted and is rebalanced at least annually. As part of the extension, the distribution rate to holders of the Preferred Shares for the extended term was changed to 4.75% per annum of the initial issue price (from 5.25% per annum). Holders of Class A Shares are receiving monthly distributions targeted at 8.0% per annum.

The performance of the Portfolio has experienced some volatility over the past few months, with the downside protection fluctuating between 46.4% and 52.0% from July to October. As of October 31, 2014, the downside protection available to the Preferred Shares is approximately 49.2% and the dividend coverage ratio is about 1.1 times. The Pfd-3 (low) rating of the Preferred Shares is based primarily on the downside protection available and the additional protection provided by an asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.

The main constraints to the rating are (1) the Company’s dependence on the value and dividend policies of the securities in the Portfolio and (2) the reliance on the manager to generate a high yield on the Portfolio to meet distributions and other trust expenses without having to liquidate portfolio 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 2014), which can be found on our website under Methodologies.