DBRS Assigns Provisional Rating of Pfd-3 (low) to Faircourt Split Trust 6.00% Preferred Securities

DBRS Limited (DBRS) has today assigned a provisional rating of Pfd-3 (low) to the 6.00% Preferred Securities to be issued by Faircourt Split Trust (the Company). The 6.00% Preferred Securities are being issued to fund the redemption of the currently outstanding 6.25% Preferred Securities, which are scheduled to mature on December 31, 2014. Additional 6.00% Preferred Securities and Trust Units may be issued on a matched basis. The 6.00% Preferred Securities will be scheduled to mature on June 30, 2019.

To the extent that net proceeds from the offering exceed funding requirements associated with the redemption of the 6.25% Preferred Securities, the Company will use such net proceeds to invest in additional assets for their existing portfolio of broadly diversified North American dividend-paying equities, income-producing securities and short-term investments (the Portfolio).

The Company has advised DBRS that the initial downside protection available to holders of the 6.25% Preferred Securities is expected to be approximately 34.9% after the payment of all issuance expenses. Dividends received on the Portfolio will be used to pay a fixed cumulative quarterly distribution to holders of the 6.00% Preferred Securities, while holders of the Trust Units are expected to receive a monthly distribution of $0.02. Based on the current dividend yield on the Portfolio as of November 24, 2014, the 6.00% Preferred Securities dividend coverage ratio is expected to be approximately 0.04 times.

According to the terms of the Company’s Declaration of Trust, the Company has the ability to borrow up to 10% of Total Assets (as defined in the Declaration of Trust) under a loan facility in order to meet its investment objectives. Under the terms of the Company’s Trust Indenture, the loan facility is considered “Senior Indebtedness,” and all amounts owing under the loan facility will be paid in priority to the 6.00% Preferred Securities. There is currently no loan facility in place and, therefore, there are currently no amounts owing under a loan facility; however, to the extent that the Company borrows under a loan facility, the rating on the 6.00% Preferred Securities could be negatively affected. DBRS will continue to monitor the situation in connection with the ongoing surveillance of the rating on the 6.00% Preferred Securities and will take appropriate rating action as necessary.

The provisional rating is primarily based on the expected level of downside protection and dividend coverage available to holders of the 6.00% Preferred Securities as well as the credit quality of the underlying companies in the Portfolio.

The main constraints to the provisional rating are the following:

(1) The downside protection available to holders of the 6.00% Preferred Securities will depend on the value of the common shares held in the Portfolio.

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

(3) Dividends and interest received on the Portfolio are currently unable to fully cover Preferred Security distributions.

(4) Reliance on the manager to generate a high yield on the investment portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

The scheduled final maturity date of the 6.00% Preferred Securities is June 30, 2019.

A provisional rating is not a final rating and may change or be different than the final rating assigned or may be discontinued altogether. The assignment of a final rating on the above-mentioned security is subject to receipt of all information and final documentation by DBRS that it deems necessary to finalize the rating.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.