DBRS Confirms Rating of Dividend 15 Split Corp. II Preferred Shares at Pfd-3 (low)

DBRS Limited (DBRS) has today confirmed the rating of the Preferred Shares issued by Dividend 15 Split Corp. II (the Company) at Pfd-3 (low). In November and December of 2006, the Company issued 5.6 million Preferred Shares (at $10.00 each) and an equal number of Class A Shares (at $15.00 each). The final redemption date for both classes of shares issued is December 1, 2019 (extended from December 1, 2014, at a special meeting of shareholders on June 3, 2013).

The Company holds a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio), which are issued by the following 15 companies: Bank of Montreal, Bank of Nova Scotia, BCE Inc., CI Financial Corp., Canadian Imperial Bank of Commerce, Enbridge Inc., Manulife Financial Corporation, National Bank of Canada, Royal Bank of Canada, Sun Life Financial Inc., TELUS Corporation, Thomson Reuters Corporation, The Toronto-Dominion Bank, TransAlta Corporation and TransCanada Corp. Up to 15% of the net asset value (NAV) of the Portfolio may be invested in equity securities of issuers other than the above companies. The Portfolio is actively managed by Quadravest Capital Management Inc. Each underlying company in the Portfolio generally represents no less than 4% and no more than 8% of the NAV of the Company.

Since the last rating confirmation in January 2015, the NAV of the Company has been decreasing, resulting in the downside protection available to the Preferred Shares falling to approximately 31.1% in December 2015 from 40.6% in December 2014. Dividends received from the Portfolio’s underlying common shares are used to pay fixed cumulative monthly cash distributions of $0.04375 per Preferred Share (yielding 5.25% annually). Dividends received on the Portfolio net of operating expenses cover approximately 83% of the Preferred Share distributions. The Company continues to write covered call options to generate additional income to supplement the dividends received on the Portfolio.

Holders of the Class A Shares receive regular monthly cash dividends targeted to be $0.10 per Class A Share to yield 8% per annum on the issue price of $15.00. No monthly distributions to the Class A Shares are made if the dividends of the Preferred Shares are in arrears or the NAV of the Company falls below 1.5 times the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions are made if the NAV of the Company is below $25.00. The NAV as of December 15, 2015, was $14.52, resulting in no distributions paid to the Class A Shares for December 31, 2015. On maturity, the holders of the Preferred Shares will be entitled to the value of the Company, up to the face value of the Preferred Shares, in priority to the holders of the Class A Shares. Holders of the Class A Shares will receive all remaining value of the Company.

The confirmation of 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 $15.00.

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.