DBRS Confirms Partners Value Split Corp. Class AA Preferred Shares at Pfd-2 (low)

DBRS Limited (DBRS) has today confirmed the Pfd-2 (low) ratings of the Class AA Preferred Shares, Series 1 (the Series 1 Preferred Shares), Class AA Preferred Shares, Series 3 (the Series 3 Preferred Shares), Class AA Preferred Shares, Series 5 (the Series 5 Preferred Shares) and the Class AA Preferred Shares, Series 6 (the Series 6 Preferred Shares; collectively, the Class AA Preferred Shares) issued by Partners Value Split Corp. (the Company).

The Company owns a portfolio (the Portfolio) of Class A Limited Voting Shares (the BAM Shares) of Brookfield Asset Management Inc. (BAM; rated A (low) by DBRS). Dividends received from the Portfolio are used to fund the payment of interest on the outstanding Series 1 debentures, Series 3 debentures and Series 4 debentures, to the extent that any have been issued and the payment of dividends on the Class AA Preferred Shares. Holders of the Junior Preferred Shares, Series 1 (the Junior Preferred Shares) are entitled to receive quarterly non-cumulative cash distributions at the discretion of the Board of Directors. Any capital appreciation of the BAM Shares will benefit the holders of the Capital Shares. All series of Class AA Preferred Shares rank senior to the Junior Preferred Shares and Capital Shares and pari passu with all other Class AA Preferred Shares with respect to payment of dividends and repayment of principal. Holders of the Capital Shares of the Company will only receive excess dividend income after interest on the Debentures, Class AA Preferred Share distributions, Junior Preferred Share distributions and other Company expenses have been paid.

The downside protection available to the Class AA Preferred Shares is approximately 84%, based on the market value of the BAM Shares as of July 2, 2015. The current Class AA Preferred Share dividend coverage ratio is approximately 1.8 times. As a result, the Company continues to be able to fund the Class AA Preferred Shares distributions without relying on other methods for generating income or reverting to the sale of common shares in the Portfolio. In the event of a shortfall, the Company may sell some of the BAM Shares, engage in securities lending or write covered call options to generate sufficient income to satisfy its obligations to pay the Class AA Preferred Shares dividends.

The Pfd-2 (low) ratings of the Class AA Preferred Shares are primarily based on the downside protection and dividend coverage available to the Class AA Preferred Shares.

The main constraints to the ratings are the following:

(1) The downside protection available to holders of the Class AA Preferred Shares depends solely on the market value of the BAM Shares held in the Portfolio, which will fluctuate over time.

(2) There is a lack of diversification as the Portfolio is entirely made up of BAM Shares.

(3) Changes in the dividend policy of BAM may result in reductions in Class AA Preferred Share dividend coverage.

(4) As BAM declares dividends in U.S. dollars, the Company is exposed to foreign currency risk relating to the Canadian-U.S. exchange rate, specifically the appreciation of the Canadian dollar versus the U.S. dollar. This may have a negative impact on the dividend coverage ratio of the Class AA Preferred Shares, as these dividends are paid in Canadian dollars.

(5) Downside protection available to the Class AA Preferred Shares may be negatively affected by the retraction of the Junior Preferred Shares.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Split Share Companies and Trusts (July 2014), which can be found on our website under Methodologies.

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.

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