DBRS Assigns Provisional Rating of Pfd-2 (low) to Allbanc Split Corp. II Class B Preferred Shares, Series 2

DBRS Limited (DBRS) has today assigned a provisional rating of Pfd-2 (low) to the Class B Preferred Shares, Series 2 (the Preferred Shares) to be issued by Allbanc Split Corp. II (the Company). The Preferred Shares will be issued as part of a share capital reorganization, which permits holders of Class A Capital Shares (the Capital Shares) to extend their investment in the Company beyond the redemption date of February 28, 2016, for an additional five years. The Preferred Shares will be issued to maintain the leveraged split share structure of the Company, so that the number of issued and outstanding Capital Shares are twice the number of issued and outstanding Preferred Shares. The Preferred Shares and Capital Shares will be redeemed by the Company on February 28, 2021.

The Company invests in a portfolio (the Portfolio) of publicly listed common shares of Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, Bank of Nova Scotia and The Toronto-Dominion Bank (collectively, the Portfolio Shares) in order to generate dividend income for the holders of the Preferred Shares and to enable holders of the Capital Shares to participate in any capital appreciation in the Portfolio Shares.

Net proceeds from the offering (after deducting the Agent’s fees and expenses of the issue), along with the proceeds from the sale of Portfolio Shares if necessary, will be used to fund the redemption of all of the Class B Preferred Shares, Series 1, as well as the Capital Shares surrendered for retraction pursuant to a special retraction right. If the net proceeds of the offering exceed the funding requirements associated with these redemptions, the Company is expected to purchase additional Portfolio Shares.

The dividends received from the Portfolio will be used to pay fixed cumulative quarterly distributions to holders of the Preferred Shares. The Capital Shares are expected to receive all excess dividend income, if any, after the Preferred Share distributions and other expenses of the Company have been paid, provided the net asset value (NAV) after giving effect to the distribution is greater or equal to the issue price of the Preferred Shares. The Company has the ability to write covered call options and engage in securities lending in order to generate additional income. Based on the current dividend yield on the Portfolio, the expected initial Preferred Share dividend coverage ratio is approximately 1.7 times.

The initial downside protection available to the holders of the Preferred Shares is expected to be greater than 54% (after offering expenses). Downside protection available to the Pre¬ferred Shares consists of the NAV of the Capital Shares. Upon maturity, the holders of the Preferred Shares will be en¬titled to the value of the Portfolio Shares, up to the face value of the Preferred Shares, in priority to the holders of the Capital Shares. The holders of the Capital Shares will be entitled to the distribu¬tion in the excess of dividend income on the Portfolio Shares beyond what is required to pay the holders of the Preferred Shares, as well as all capital appreciation.

The provisional Pfd-2 (low) rating of the Preferred Shares is primarily based on the expected level of downside protection and dividend coverage available to holders of the Preferred Shares, as well as the credit quality and consistency of dividend distributions of the Portfolio holdings.

The main constraints to the provisional rating are the following:

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

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

(3) The entire Portfolio is concentrated in the Canadian financial services industry.

A provisional rating is not a final rating and may change or be different from the final rating assigned, or may be discontinued altogether. The assignment of a final rating on the above-mentioned security is subject to receipt of all information and final documentation by DBRS that it deems necessary to finalize the rating.

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.