DBRS Confirms S Split Corp. Preferred Shares at Pfd-3

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

In May 2007, the Company raised gross proceeds of $118.75 million by issuing 4.75 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). One unit thus consists of one Preferred Share and one Class A Share. The redemption date for both classes of shares issued has been extended to November 30, 2021 (the Termination Date).

The net proceeds from the initial offering were used to purchase a portfolio of common shares of the Bank of Nova Scotia (the BNS Shares). Dividends received from the BNS Shares are used to pay a fixed cumulative monthly dividend to the holders of the Preferred Shares equal to 5.25% per annum. Based on the most recent dividend paid on the BNS Shares, the dividend income net of management fees and other expenses is expected to cover approximately 44% of the Preferred Share distributions. As of November 26, 2015, the Portfolio provides downside protection of approximately 39% to the Preferred Shares.

The Company may write covered call options on the BNS Shares to generate additional returns in order to supplement the dividend income earned on the BNS Shares. In addition, as of January 2, 2015, according to new investment restrictions and objectives, the Company may invest up to 10% of its net assets to purchase call options in respect of securities in which the Company is permitted to invest.

The Company aims to provide the holders of the Class A Shares with regular monthly cash distributions in an amount targeted to be 6% per annum on the net asset value (NAV) of the Class A Shares. These distributions result in an average annual grind on the NAV of approximately 2.3% for the next five years. No distributions will be paid to the Class A Shares if the asset coverage available to the Preferred Shares drops below 1.65 times. Furthermore, no special distributions will be paid to the Class A Shares if the payment would drop the Company NAV to less than $25; however, special distributions may be made to mitigate any potential tax liabilities to the Company. The combination of the asset coverage test and the Class A Share distributions being based on the Company NAV provides capital preservation for holders of the Preferred Shares.

On the Termination Date, the holders of the Preferred Shares will have priority over the holders of the Class A Shares with respect to return of capital and distributions. After the holders of the Preferred Shares are fully paid, the holders of the Class A Shares will receive the remaining value of the Company.

The primary constraints to the rating are the Company’s dependence on the value of the BNS Shares, the price volatility and concentration of the entire portfolio in the BNS Shares, and the potential impact of changes in Bank of Nova Scotia’s dividend policy on the common shares.

Based on the aforementioned considerations and performance metrics, DBRS confirms the Pfd-3 rating of the Preferred Shares issued by S 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.

DBRS’s rating definitions and the terms of use of such ratings are available at www.dbrs.com.