DBRS Confirms Rating of Life & Banc Split Corp. Preferred Shares at Pfd-3 (low)

DBRS Limited (DBRS) has today confirmed the rating on the Preferred Shares issued by Life & Banc Split Corp. (the Company) at Pfd-3 (low). In October 2006, the Company raised gross proceeds of $300 million by issuing 12 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). Since then, the Company has completed several additional treasury offerings. The final redemption date for both classes of shares issued was originally November 29, 2013, but was extended to November 29, 2018.

The Company invests in 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) and four Canadian life insurance companies (Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc., Manulife Financial Corporation and Sun Life Financial Inc.). The Portfolio was initially equally weighted and is rebalanced at least annually.

Dividends received from the Portfolio are used to pay to each holder of the Preferred Shares fixed cumulative quarterly dividends currently equal to 4.75% per annum (p.a.) of the original issue price (changed from 5.25% p.a. as part of the extension). Holders of Class A Shares are receiving monthly distributions targeted to be $0.10 per share. As protection to the holders of the Preferred Shares, an asset coverage test does not permit the Company to make monthly distributions to the Class A Shares if the dividends of the Preferred Shares are in arrears or the net asset value (NAV) of the Portfolio is less than $15. In addition, no special distributions can be made to the Class A Shares if, after such distribution, the NAV of the Portfolio would be below $25. The Company from time to time writes covered call options or engages in security lending with respect to the common shares of the Portfolio to generate additional income to supplement the dividends received on the Portfolio.

Security lending exposes the Portfolio to the risk of loss if the borrower defaults on its obligations to return the borrowed securities and if the collateral is insufficient to reconstitute the portfolio of loaned securities.

The performance of the Portfolio has experienced some volatility over the past year, with the downside protection fluctuating between 41.8% and 52.0% from November 2014 to November 2015. As of November 19, 2015, the downside protection available to the Preferred Shares is approximately 45.4% and the dividend coverage ratio is about 1.1 times. The Pfd-3 (low) rating of the Preferred Shares is based primarily on the downside protection available and the additional protection provided by the asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.

The main constraints to the rating are (1) the Company’s dependence on the value and dividend policies of the securities in the Portfolio and (2) the reliance on the manager to generate a high yield on the Portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

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.