DBRS Assigns Provisional Rating of Pfd-2 (low) to BNS Split Corp. II Class B Preferred Shares, Series 2

DBRS Limited (DBRS) has today assigned a provisional rating of Pfd-2 (low) to the Class B Preferred Shares, Series 2 (the Preferred Shares) to be issued by BNS Split Corp. II (the Company). The Preferred Shares will be issued as part of a share capital reorganization, which permits holders of Class A Capital Shares (the Capital Shares) to extend their investment in the Company beyond the redemption date of September 22, 2015, for an additional five years to September 22, 2020. The Preferred Shares will be issued to maintain the leveraged split share structure of the Company, so that the number of issued and outstanding Capital Shares are twice the number of issued and outstanding Preferred Shares. The Preferred Shares and Capital Shares will be redeemed by the Company on September 22, 2020.

Net proceeds from the offering (after deducting the Agent’s fees and expenses of the issue) along with the proceeds from the sale of shares of The Bank of Nova Scotia (BNS shares) if necessary, will be used to fund the redemption of all of the Class B Preferred Shares, Series 1 as well as the Capital Shares surrendered for redemption pursuant to a special retraction right. If the net proceeds of the offering exceed the funding requirements associated with these redemptions, the Company is expected to purchase additional BNS shares.

The Company invests in a portfolio (the Portfolio) of common shares of The Bank of Nova Scotia or the BNS shares. The dividends received from the Portfolio will be used to pay fixed cumulative quarterly distributions to holders of the Preferred Shares. The Capital Shares are expected to receive all excess dividend income after the Preferred Share distributions and other expenses of the Company have been paid. Based on the current dividend yield on the Portfolio, the expected initial Preferred Share dividend coverage ratio is approximately 2.4 times. The Company has the ability to engage in securities lending in order to generate additional income. Based on the estimated offering size, the initial downside protection available to holders of the Preferred Shares is expected to be greater than 61%.

The provisional Pfd-2 (low) rating of the Preferred Shares is primarily based on the expected level of downside protection and dividend coverage available to holders of the Preferred Shares, as well as the credit quality and consistency of dividend distributions of the Portfolio holdings.

The main constraints to the provisional rating are the following:

(1) The downside protection available to holders of the Preferred Shares will depend on the value of the BNS shares held in the Portfolio.

(2) Volatility of price and changes in the dividend policies of the underlying issuer, The Bank of Nova Scotia, may result in significant reductions in interest coverage or downside protection from time to time.

(3) The concentration of the Portfolio in the BNS shares.

A provisional rating is not a final rating and may change or be different from 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 2015), 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.