DBRS Confirms Brompton Split Banc Corp. Preferred Shares Rating of Pfd-3 (high)

DBRS Limited (DBRS) has today confirmed the rating of the Preferred Shares issued by Brompton Split Banc Corp. (the Company) at Pfd-3 (high).

In November 2005, the Company issued approximately 6.1 million of Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). The final redemption date for both classes of shares issued is November 29, 2017. Net proceeds from the offering were used to purchase a portfolio of common shares (the Portfolio) issued by the six major banks in Canada: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and The Toronto-Dominion Bank. The Portfolio was initially equally weighted and is subject to annual rebalancing.

Distributions are made on a quarterly basis on the Preferred Shares in the amount of $0.1125, yielding 4.5% annually, with the latest distribution paid on July 15, 2015. Distributions are made on a monthly basis on the Class A Shares in the amount of $0.10, yielding 8.0% per annum, with the latest distribution paid on August 17, 2015. No monthly distributions to the Class A Shares will be made if distributions to the Preferred Shares are in arrears or the NAV of the Company falls below 1.5 times the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions will be made if the NAV of the Company is below $25. On maturity, the holders of the Preferred Shares will be entitled to the value of the Company up to the face value of the Preferred Shares in priority to the holders of the Class A Shares. Holders of the Class A Shares will receive the remaining value of the Company.

The Company has the ability to write covered call options or covered put options with respect to all or part of the common shares of the Portfolio to generate additional income. In addition, the Company may enter into Securities Lending Agreements in order to generate an alternative source of income.

The main form of credit enhancement available to the Preferred Shares is a buffer of downside protection. Downside protection corresponds to the percentage decline in market value of the Portfolio that must be experienced before the Preferred Shares would be in a loss position. The amount of downside protection available to the Preferred Shares as of August 6, 2015, is 55.8%.

In the past year, the performance of the Company has been stable. Current dividend coverage is 1.65 times. Quarterly Preferred Share and monthly Capital Share distributions have remained unchanged since 2013. Other key rating considerations include the credit quality, volatility and diversification of the Portfolio as well as changes in the dividend policies of the underlying companies in the Portfolio.

Based on the aforementioned considerations and performance metrics, DBRS confirms the Pfd-3 (high) rating of the Preferred Shares issued by Brompton Split Banc Corp.

DBRS will continue to closely monitor changes in the credit quality of the Preferred Shares. The timing of DBRS rating actions will generally follow the surveillance guidelines listed in DBRS’s split share methodology.

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.