DBRS Confirms Rating on Faircourt Split Trust 6.00% Preferred Securities at Pfd-3 (low)

DBRS Limited (DBRS) has today confirmed the rating of Pfd-3 (low) on the 6.00% Preferred Securities (the Preferred Securities) issued by Faircourt Split Trust (the Trust).

On December 30, 2014, the Trust completed a reorganization during which 1.5 million of the 6.00% Preferred Securities were issued at a price of $10.00 per Preferred Security for a total of $15 million in gross proceeds and all of the 6.25% preferred securities were fully redeemed. The maturity date for the 6.00% Preferred Securities is June 30, 2019.

The net assets of the Trust are invested in a portfolio of broadly diversified North American dividend-paying equities, income-producing securities and short-term investments (the Portfolio). As of June 30, 2015, the Portfolio was composed of the following assets: Financials (15.89%), Cash and Short-Term Investments (10.35%), Consumer Discretionary/Staples (18.41%), Real Estate Investment Trusts (19.27%), Industrials (11.94%), Materials (6.4%), Information Technology (3.03%), Utilities (7.35%) and Health Care (7.42%).

The Portfolio generally consists of equities and securities of Canadian issuers, but up to 40% of the Portfolio may include equities and securities of non-Canadian issuers, provided that 70% of the Portfolio remains denominated in or hedged back to Canadian dollars at all times. No more than 10% of the Portfolio may consist of securities of a single issuer, with the exception of the Government of Canada, a Canadian province or a Canadian municipality.

Holders of the Preferred Securities receive fixed quarterly preferred interest payments of $0.15 per security to yield 6.00% annually. Based on yields of underlying securities as of December 15, 2015, the Portfolio currently receives dividends to cover 14% of Preferred Security distributions. As of December 14, 2015, downside protection available to holders of the Preferred Securities was 30.2%.

Holders of the Trust Units (the Trust Units) receive regular monthly distributions in the amount of $0.04 (an increase from $0.02 as of June 2015). These distributions, however, are subject to change at the discretion of the Trust, prevailing market conditions and the Trust’s asset coverage test. All distributions made to holders of the Trust Units are subordinated to the distributions made to holders of the Preferred Securities. The asset coverage test does not permit any cash distributions to the unitholders if, after giving effect to the proposed distribution, the total assets of the Portfolio would be less than 1.4 times the outstanding principal amount of the Preferred Securities.

The Preferred Share distributions will result in an average annual grind on the net asset value (NAV) of 4.4% in the next 3.5 years. The Trust has the ability to write covered calls on securities held in the Portfolio and cash-secured put options to generate additional income to supplement the yield earned on the Portfolio.

According to the terms of the Trust’s Declaration of Trust, the Trust has the ability to borrow up to 10% of Total Assets (as defined in the Declaration of Trust) under a loan facility in order to meet its investment objectives. Under the terms of the Company’s Trust Indenture, the loan facility is considered Senior Indebtedness, and all amounts owing under the loan facility will be paid in priority to the 6.00% Preferred Securities. There is currently no loan facility in place and, therefore, there are currently no amounts owing under a loan facility; however, to the extent that the Trust borrows under a loan facility, the rating on the 6.00% Preferred Securities could be negatively affected. DBRS will continue to monitor the situation in connection with the ongoing surveillance of the rating on the 6.00% Preferred Securities, and will take appropriate ratings action as necessary.

The main constraints to the rating are the following:

(1) The downside protection available to holders of the 6.00% Preferred Securities will depend on the value of the common shares held in the Portfolio.

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

(3) Dividends and interest received on the Portfolio are currently unable to fully cover Preferred Share distributions.

(4) Reliance on the manager to generate a high yield on the investment 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.