DBRS Confirms Brompton Lifeco Split Corp. Preferred Shares at Pfd-4 (high)

DBRS Limited (DBRS) has today confirmed the rating of the Preferred Shares issued by Brompton Lifeco Split Corp. (the Company) at Pfd-4 (high).

In April 2007, during the initial public offering, the Company issued 3.1 million Preferred Shares (the Preferred Shares) at $10.00 each, along with an equal number of Class A Shares at $15.00 each. On May 1, 2014, the Company completed a secondary treasury offering raising approximately $19.7 million in gross proceeds. The new termination date for both classes of shares was set to April 29, 2019. In September 2014, the Company completed another secondary treasury offering, raising approximately $51.6 million in gross proceeds. The Company holds a portfolio (the Portfolio) consisting of common shares of the four largest publicly traded Canadian life insurance companies: Great-West Lifeco Inc., Sun Life Financial Inc., Manulife Financial Corporation, and Industrial Alliance Insurance and Financial Services Inc. The Portfolio is approximately equally weighted and subject to annual rebalancing. 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. Holders of the Class A Shares will receive the remaining value of the Company.

The Preferred Shares are entitled to receive fixed cumulative, quarterly distributions in the amount of $0.14375 per preferred share, yielding 5.75% annually on the issue price of $10.00 per share. Holders of the Class A Shares are expected to receive regular monthly cash distributions targeted at $0.075 per share, yielding 6% annually on the original issue price of $15.00 per share.

Based on the dividend yields of the underlying companies in the Portfolio and after management fees and other expenses have been paid, the dividend coverage ratio stands at 0.6 times. The Company has the ability to write covered-call options or cash-covered put options with respect to all or part of the common shares of the Portfolio and may also engage in securities lending to generate additional income to supplement the dividends received on the Portfolio. No monthly distributions on the Class A Shares will be made if the Preferred Share distributions are in arrears or if the NAV of the Company falls below 1.5 times the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions (i.e., distributions in excess of $0.075 per month) will be made if the NAV of the Company is below $25.00.

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 October 15, 2015 is 34%.

Since the last review conducted on October 24, 2014, performance of the Company’s preferred shares remains stable. Quarterly Preferred Share distributions have been paid regularly since the inception of the Company in 2007. 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-4 (high) rating of the Preferred Shares issued by Brompton Lifeco Split 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.