DBRS Downgrades Big Bank Big Oil Split Corp. to Pdf-3

DBRS Limited (DBRS) has today downgraded the rating of the Class A, Preferred Shares (the Preferred Shares) issued by Big Bank Big Oil Split Corp. (the Company) to Pdf-3. In June 2006, the Company issued 2.72 million Preferred Shares at $10 each and an equal number of Capital Shares (the Capital Shares) at $15 each. The final redemption date for the Preferred Shares is December 30, 2016.

The net proceeds from the offering were used to purchase a portfolio of common shares of the six largest banks and several of the largest oil and gas companies in Canada (collectively, the Portfolio). The Portfolio was initially equally weighted and is rebalanced annually. Dividends received on the Portfolio are used to pay fixed cumulative quarterly distributions to holders of the Preferred Shares, yielding 5.25% annually on the initial issue price. The last distribution to holders of Capital Shares in the amount of $0.05 was recorded on November 26, 2015. Currently, the net asset value (NAV) test of 1.5 times is not being met. As a result, no distributions to the Capital Shares are expected to be made until the NAV per unit is more than $15.

On April 2, 2015, the rating of the Preferred Shares was downgraded to Pfd-3 (high) due to the drop in downside protection caused by the plunge in oil and major Canadian bank share prices beginning from the end of 2014 and continuing into 2015. The NAV of the Company continued to decline in value during the remaining half of 2015 finally reaching the $14.67 mark on December 9, 2015. As of December 9, 2015, the downside protection available to the Preferred Shares is 31.8%. Dividend coverage is 1.25 times.

Because the downside protection continued to remain below acceptable levels during the past four months and considering the presence of the NAV test that should protect the NAV from additional grind, the rating of the Preferred Shares has been downgraded to Pfd-3 from Pfd-3 (high).

The main constraints on the rating are as follows:

(1) The downside protection provided to holders of the Preferred Shares is dependent on the value of the shares in the Portfolio.

(2) Volatility of price and changes in the dividend policies of the underlying companies in the Portfolio may result in significant reductions in downside protection or dividend coverage from time to time.

(3) The concentration of the entire Portfolio is in the Canadian banking and energy industry.

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.