DBRS Confirms Financial 15 Split Corp. Preferred Shares at Pfd-4 (high)

DBRS Limited (DBRS) has today confirmed the rating of the Preferred Shares (the Preferred Shares) issued by Financial 15 Split Corp. (the Company) at Pfd-4 (high). In November 2003, the Company issued 10.9 million of Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). The redemption date for both classes of shares issued is December 1, 2020. On maturity, the holders of the Preferred Shares will be entitled to the value of the Company, up to the face amount 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 Company holds a portfolio (the Portfolio) consisting primarily of common shares of 15 high-quality North American financial services companies: Bank of America Corporation, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, CI Financial Corp., Citigroup Inc., The Goldman Sachs Group Inc., Great-West Lifeco Inc., JP Morgan Chase & Co., Manulife Financial Corporation, National Bank of Canada, Royal Bank of Canada, Sun Life Financial Inc., Toronto-Dominion Bank and Wells Fargo & Company (collectively, the Portfolio Companies). Up to 15% of the net asset value (NAV) of the Company may be invested in securities of issuers other than those mentioned above. These names include AGF Management Limited and U.S. Bancorp as of May 31, 2015. The common shares of a particular Portfolio Company each represent between 4% and 8% of the total NAV of the Company, and no more than 10% of the NAV of the Company may be invested in any single issuer. The Portfolio is actively managed by Quadravest Capital Management Inc.

A portion of the Company’s Portfolio is exposed to currency risk as it includes securities and options denominated in U.S. dollars while the NAV of the Company is expressed in Canadian dollars. The Company has not entered into currency hedging contracts for the U.S.-dollar portion of the Portfolio. As of May 31, 2015, approximately 40% of the Portfolio was invested in U.S.-dollar-denominated assets.

The Preferred Shares pay a fixed cumulative monthly dividend of $0.04375 per Preferred Share, yielding 5.25% annually on their issue price of $10 per share. Holders of the Class A Shares are expected to receive regular monthly cash distributions in an amount to be determined by the Board of Directors. No regular monthly distributions will be paid to the Class A Shares if the NAV per unit is below the $15 threshold or if any dividends on the Preferred Shares are in arrears.

During 2015, the NAV of the Company has experienced some fluctuation due to volatility in the markets. Downside protection available to holders of the Preferred Shares is 40.7% as of December 15, 2015. The dividend coverage ratio has risen to 0.6 times over the past year. Regular monthly Class A Share distributions will result in an average grind of approximately 3.5% over the next five years.

RATING CONSIDERATIONS

Strengths
-- The downside protection available to holders of the Preferred Shares is approximately 40.7% as of December 15, 2015.
-- The asset coverage test that does not permit monthly distributions to the Class A shareholders if the NAV per unit falls below the $15 threshold.

Challenges
-- The protection provided to holders of the Preferred Shares is dependent on the value of the common shares of the Portfolio.
-- The Portfolio is heavily concentrated in the financial services industry.
-- Volatility of price and changes in the dividend policies of the underlying companies in the Portfolio may result in significant reductions in downside protection.
-- Reliance on the Portfolio manager to generate additional income through methods such as option writing to supplement yield earned on the Portfolio.
-- A significant portion of the Portfolio is denominated in U.S. dollars that exposes the Portfolio to foreign currency risk, which is unhedged.

Based on the aforementioned considerations and performance metrics, DBRS confirms the Pfd-4 (high) rating of the Preferred Shares issued by Financial 15 Split Corp.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.