DBRS Confirms 5Banc Split Inc. Class C Preferred Shares, Series 1 at Pfd-2

DBRS Limited (DBRS) has today confirmed the rating of Class C Preferred Shares, Series 1 (the Preferred Shares) issued by 5Banc Split Inc. (the Company) at Pfd-2.

The Preferred Shares were issued as part of a share capital reorganization, where the Company redeemed all outstanding Class B Preferred Shares and approximately 1.59 million Class B Capital Shares (the Capital Shares) belonging to shareholders who elected to exercise a Special Retraction Right on December 15, 2011. Approximately 2.58 million Class C Preferred Shares were issued on the same day, in order to attain the desired leveraged split share structure of the Company.

The net proceeds from the offering were used to fund the redemption of the Class B Preferred Shares and retraction of the Capital Shares under the Special Retraction Right for those holders who did not want to extend their investment in the Company. The Company holds a portfolio of common shares of the big five Canadian chartered banks (the Portfolio): Royal Bank of Canada, Canadian Imperial Bank of Commerce, Bank of Nova Scotia , Bank of Montreal, and The Toronto-Dominion Bank. The Portfolio was initially rebalanced to an equally-weighted position among the five banks after the reorganization. Currently, the Portfolio is not actively traded.

Dividends received from the Portfolio are used to pay a quarterly fixed, cumulative, preferential distribution of $0.11875 per Preferred Share to yield 4.75% per annum. As of November 11, 2015, the downside protection was approximately 69%. Based on the dividend yields on the underlying Portfolio holdings as of November 11, 2015, the Preferred Share dividend coverage ratio is approximately 2.5 times. Shortfalls are expected to be funded through the sale of Portfolio securities, although the Company may also engage in securities lending, where the Portfolio would be exposed to losses in the event a borrower defaults on its obligations to return the borrowed securities. Since the Portfolio generates sufficient income to fully cover the Preferred Share distributions, the Company is not expected to be involved in securities lending. The Company’s excess dividends, net of all expenses, may be distributed to the holders of the Capital Shares. Such distributions will be subordinated to all distributions made to the holders of the Preferred Shares.

On maturity date, the holders of the Preferred Shares will be entitled to the value of the Portfolio, up to the face value of the Preferred Shares, in priority to the holders of the Capital Shares. Holders of the Capital Shares will be entitled to the remaining value of the Portfolio.

Since the last review conducted on November 24, 2014, performance of the Company’s Preferred Shares has remained stable. Some strengths considered in rating are:

-- Quarterly Preferred Share distributions have been paid regularly since the reorganization completed in December of 2011
-- Strong credit quality of the underlying portfolio holdings
-- A dividend coverage ratio greater than 1.0 times

The challenges include:

-- Price volatility and diversification of the Portfolio which is concentrated in one industry
-- Potential changes in the dividend policies of the underlying companies in the Portfolio
-- The protection provided to holders of the Preferred Shares is dependent on the value of the common shares of the Portfolio

Based on the aforementioned considerations and performance metrics, DBRS confirms the Pfd-2 rating of the Class C Preferred Shares, Series 1 issued by 5Banc Split Inc.

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.