DBRS Confirms Allbanc Split Corp. II Class B Preferred Shares, Series 1 at Pfd-2

DBRS Limited (DBRS) has today confirmed the rating of the Class B Preferred Shares, Series 1 (the Class B Preferred Shares) issued by Allbanc Split Corp. II (the Company) at Pfd-2. The Class B Preferred Shares were issued in February 2011 following a reorganization of the Company. The Company used the proceeds from the initial share issuance of Class A Preferred Shares and Class A Capital Shares to purchase a portfolio of common shares of the top six Canadian chartered banks (the Portfolio) that is passively managed. As of February 12, 2015, the Portfolio’s composition is: The Toronto-Dominion Bank (23.5%; rated AA by DBRS), Royal Bank of Canada (22.3%; rated AA by DBRS), Bank of Nova Scotia (18.4%; rated AA by DBRS), Canadian Imperial Bank of Commerce (15.4%; rated AA by DBRS), Bank of Montreal (15.1%; rated AA by DBRS) and National Bank of Canada (5.3%; rated AA (low) by DBRS).

The dividends received from the Portfolio are used to pay a fixed cumulative quarterly distribution of $0.2316 per share to holders of the Class B Preferred Shares, yielding approximately 4.25% annually on the initial issue price of $21.80. The current yield on the Portfolio shares fully covers the Class B Preferred Share dividends, providing dividend coverage of approximately 2.8 times. The Class A Capital Shares receive all excess dividend income after the Class B Preferred Share distributions and other expenses of the Company have been paid.

Since the last rating action in February 2014, the performance of the Company has been volatile. The trend seen in the net asset value, however, is in line with the movement seen in the volatile share prices of Canadian banks. Downside protection increased steadily to 64.1% on February 12, 2015, from 60.9% on February 13, 2014, while increases in dividend distributions from underlying banks helped boost the dividend coverage ratio.

The main constraints to the rating are the following:

(1) The downside protection provided to holders of the Class B Preferred Shares is dependent on the value of the shares in the Portfolio.

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

(3) The entire Portfolio is concentrated in the Canadian financial services industry.

The Class B Preferred Shares will be redeemed by the Company on February 28, 2016.

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.

Going forward, DBRS will not provide rating reports for Split Shares companies that are being reviewed for surveillance purposes. This change will be made in an effort to provide more concise and meaningful updates. A rating report will continue to be published for initial fund ratings, reorganizations and extensions.