DBRS Downgrades Brookfield Soundvest Split Trust Preferred Securities to Pfd- 5 from Pfd-4 (low)

DBRS Limited (DBRS) has today downgraded the rating on the Preferred Securities issued by Brookfield Soundvest Split Trust (the Trust) to Pfd-5 from Pfd-4 (low).

In March 2005, the Trust raised gross proceeds of $180 million by issuing 7.2 million Preferred Securities (at $10 each) and an equal number of Capital Units (at $15 each). On March 27, 2015, unitholders of the Trust voted to extend the term of the fund by five years. The new maturity is March 31, 2020.

The net proceeds from the initial offering were invested in a diversified portfolio of Canadian income trusts (the Portfolio). Eligible investments of the Trust currently include common shares and preferred shares, income trusts, income securities (including bonds and debentures), real estate investment trusts (REITs), Canadian mortgage-backed securities and other equity securities. The Trust may engage in securities lending to generate additional income. The Trust has access to a loan facility with a maximum draw of the lower of $2.0 million or 7% of the value of the portfolio assets. As of June 30, 2015, there were no balances outstanding on the loan facility.

Holders of the Preferred Securities receive fixed quarterly interest payments yielding 6.0% annually. The Capital Units are expected to receive regular monthly cash distributions, subject to the Preferred Security asset coverage ratio being greater than 1.4 times. The Capital Unit distributions were suspended in August 2011 for the reason of the asset coverage test not being met.

Since the last rating confirmation of the Preferred Securities at Pfd-4 (low) on March 31, 2015, the NAV of the Trust has been gradually decreasing as a consequence of declining prices of the underlying shares in the Portfolio. As of March 4, 2016, the downside protection available to the Preferred Securities is 6.6%, a change of 13.8% compared to the previous year’s 20.4% recorded on March 24, 2015. Based on the yield on the Portfolio as of March 4, 2016, the Preferred Securities distribution coverage ratio is approximately 0.5 times. The insufficient amount of Portfolio dividends to cover Preferred Security distributions is projected to create an average annual grind on the Portfolio of approximately 3.2% in the next four years.

Considering the current downside protection of 6.6%, which is subject to volatility in the value of the Portfolio and the amount of grind present on the Portfolio, DBRS has downgraded the rating on the Preferred Securities issued by Brookfield Soundvest Split Trust to Pfd-5.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Split Share Companies and Trusts (July 2015), which can be found on our website under Methodologies.

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.