DBRS Finalizes Provisional Rating of Pfd-3 (high) to Brompton Oil Split Corp.

DBRS Limited (DBRS) has today finalized the provisional rating of Pfd-3 (high) to the Preferred Shares to be issued by Brompton Oil Split Corp. (the Company). The Company issued an equal number of Preferred Shares and Class A Shares at an issue price of $10.00 per Preferred Share and $15.00 per Class A Share. The Preferred Shares and Class A Shares are scheduled to mature on March 31, 2020.

Net proceeds from the offering were used to invest in the common shares of at least 15 large capitalization North American oil and gas issuers (the Portfolio). The Portfolio is initially equally weighted and will be rebalanced at least semi-annually. A portion of the Portfolio’s investments are denominated in U.S. dollars; however, this exposure is expected to be hedged completely back to the Canadian dollar.

The Company has advised DBRS that 2,800,000 Preferred Shares and 2,800,000 Class A Shares were issued on the initial offering, for gross proceeds of $70,000,000. The initial downside protection available to holders of the Preferred Shares is approximately 57.3% (after offering expenses). Dividends received on the Portfolio are used to pay a fixed cumulative quarterly distribution to holders of the Preferred Shares of $0.1250 per Preferred Share ($0.50 per annum or 5.0% per annum on the initial issue price of $10.00 per Preferred Share), while holders of the Capital Shares are expected to receive a regular monthly non-cumulative cash distribution of $0.10 per Class A Share. The Preferred Share dividend coverage ratio is approximately 0.9 times, based on the initial offering size. The Company has the ability to write covered call options or engage in securities lending in order to generate additional income. The Company has also granted a security interest in the Portfolio to RBC Investor Services Trust, in its capacity as custodian of the Company’s property (the Custodian), as security for any obligations owing by the Company to the Custodian. The Custodian also has a right to exercise set-off against the Company’s property (including the Portfolio) to the extent that the Company fails to satisfy any obligations owing to the Custodian.

The main constraints to the final rating are the following:

(1) The downside protection available to holders of the Preferred Shares 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 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.

(5) The concentration of the Portfolio in one industry.

(6) The Custodian has been granted a security interest in the Portfolio as security for any obligations owing by the Company to the Custodian, and the Custodian has set-off rights against the property of the Company (including the Portfolio).

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.