DBRS Confirms Big 8 Split Inc. Class D Preferred Shares, Series 1 at Pfd-2 (low)

DBRS Limited (DBRS) has today confirmed the rating of Class D Preferred Shares, Series 1 (the Preferred Shares) issued by Big 8 Split Inc. (the Company) at Pfd-2 (low).

The Preferred Shares were issued as part of a share capital reorganization in December 2013, where the Company redeemed all outstanding Class B Preferred Shares, Series 1 and Class C Preferred Shares, Series 1. At the same time, the Company issued Class D Capital Shares (the Capital Shares) to provide downside protection to the Preferred Shares and redeemed the previously outstanding Class A Capital Shares. The Class D Preferred Shares and Class D Capital Shares were offered at issue prices of $10.00 and $12.50, respectively. There is an equal number of Class D Preferred Shares and Class D Capital Shares outstanding and both classes of shares will mature on December 15, 2018.

The Company invests in a portfolio (the Portfolio) consisting of common shares of Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, The Toronto-Dominion Bank, Great-West Lifeco Inc., Manulife Financial Corporation and Sun Life Financial Inc. The Portfolio is approximately equally weighted and is not actively traded.

Dividends received from the Portfolio are used to pay fixed cumulative quarterly distributions to holders of the Preferred Shares, yielding 4.50% per annum on the initial issue price of $10.00. The Capital Shares are expected to receive all excess dividend income after the Preferred Share distributions and other Company expenses have been paid. Based on the current dividend yield on the Portfolio, the Preferred Share dividend coverage ratio is approximately 1.5 times, and as such there is no grind on the portfolio.

In order to generate additional returns, the Company has the ability to engage in securities lending. The Portfolio would be exposed to losses in the event a borrower defaults on its obligation to return borrowed securities. However, since the Portfolio currently generates sufficient income to fully pay the Preferred Share dividends, it is not anticipated that the Company will be involved in securities lending.

Downside protection available to the Preferred Shares consists of the net asset value of the Capital Shares. As of November 11, 2015, the downside protection was approximately 55.6%. On the maturity date, the holders of the Preferred Shares will be entitled to the repayment of principal and any accrued dividends in priority to the Capital Shares. The Capital Shares will be entitled to the remaining value of the Portfolio, including all capital appreciation.

A primary constraint to the rating is the Company’s dependence on the value of the underlying common shares of the Portfolio. Other constraints include the impact of possible changes in dividend policies of the underlying companies in the Portfolio and the concentration of the entire Portfolio in the Canadian financial services industry. The Portfolio is more likely to experience greater volatility in its net asset value than a portfolio with more diversified holdings by industry. Some other rating considerations include consistency of dividend distributions of the underlying common shares in the Portfolio and strong credit quality of the Portfolio holdings.

Based on the aforementioned considerations and performance metrics, DBRS confirms the Pfd-2 (low) rating of the Class D Preferred Shares, Series 1 issued by Big 8 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.

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