DBRS Downgrades Preferred Shares Issued by Brompton Oil Split Corp. to Pfd-3

DBRS Limited (DBRS) has today downgraded the Preferred Shares issued by Brompton Oil Split Corp. (the Company) to Pfd-3 from Pfd-3 (high). On February 24, 2015, the Company issued 2,800,000 Preferred Shares and 2,800,000 Class A Shares at an issue price of $10.00 per Preferred Share and $15.00 per Class A Share for a total of $70,000,000 in gross proceeds. Both classes of shares are scheduled to mature on March 31, 2020. On maturity, the holders of the Preferred Shares will be entitled to the repayment of principal and any accrued dividends in priority to the Class A Shares. Holders of the Class A Shares will be entitled to the remaining value of the Portfolio, including all capital appreciation (if any).

Net proceeds from the offering were used to invest in common shares of at least 15 large capitalization North American oil and gas issuers (the Portfolio) selected from the S&P 500 Index and the S&P/TSX Composite Index. In addition, the Company may also invest up to 25% of the Portfolio value in the common shares of issuers listed on the S&P 500 Index or the S&P/TSX Composite Index that satisfy its investment criteria, operating in energy subsectors including equipment, services, pipelines, transportation and infrastructure. The Portfolio is approximately equally weighted with active security selection and is rebalanced at least semi-annually. A portion of the Portfolio’s investments are denominated in U.S. dollars; however, this exposure is hedged back to Canadian dollars. The Company has the ability to write covered call options or engage in securities lending in order to generate additional income.

Dividends received on the Portfolio are used to pay a fixed cumulative quarterly distribution to holders of the Preferred Shares of $0.1250 per Preferred Share ($0.50 per annum or 5.0% per annum on the initial issue price of $10.00 per Preferred Share). Holders of the Capital Shares are expected to receive a regular monthly non-cumulative cash distribution of $0.10 per Class A Share ($1.20 per annum), subject to the asset coverage test which does not permit any distributions to holders of the Class A Shares if the net asset value (NAV) of the Company falls below $15.00.

As of February 5, 2016, the dividend coverage ratio is 1.36. The downside protection available to holders of the Preferred Shares is approximately 37%. Since the initial rating in February 2015, the oil and energy equity markets have experienced a decline in prices which is reflected in the Company’s NAV. The level of downside protection currently available to the Preferred Shares and the asset coverage test to permit distributions on the Capital Shares support the Pfd-3 rating on the Preferred Shares.

The main constraints to the rating are the following:

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

(2) Volatility of price 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) 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.

(4) The concentration of the Portfolio in one 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.