DBRS Confirms Utility Split Trust Class B Preferred Securities at Pfd-2

DBRS Limited (DBRS) has today confirmed the rating of the Class B Preferred Securities issued by Utility Split Trust (the Fund) at Pfd-2. Approximately 1.2 million Class B Preferred Securities were issued on December 19, 2011, following the redemption of the previously outstanding Preferred Securities in accordance with their original terms as part of a share capital reorganization. The final redemption date for the Class B Preferred Securities is December 31, 2016.

The Fund holds a portfolio (the Portfolio) of utility issuers that consists of corporations or income trusts which generate, transmit and/or distribute electricity, water and/or natural gas, including those that supply raw materials for the generation of electricity. The Portfolio is actively managed by First Asset Investment Management Inc.

Dividends received on the Portfolio are used by the Fund to make quarterly fixed cumulative distributions of $0.13125 per Class B Preferred Security to yield 5.25% annually on the initial $10 issue price. Holders of the Capital Units are currently receiving $0.05 per unit each month after the Class B Preferred Securities distributions and other expenses of the Fund have been paid. The Capital Units do not have a fixed monthly distribution target. The Fund assesses and announces distributions on a monthly basis. There is a net asset value (NAV) test of 1.5 times, which does not permit any distributions to the Capital Unit holders if the NAV of the Portfolio is less than 1.5 times the outstanding principal amount for the Class B Preferred Securities.

As of June 7, 2015, the downside protection available to holders of the Class B Preferred Securities is 64%. Overall, the downside protection has been stable over the last year, only showing a slight decline in the end of 2015, which has been regained since then. Based on the current dividend yields on the underlying portfolio entities, the dividend coverage ratio (net of expenses) is expected to be approximately 0.4 times for the remaining six months. Occasionally, the Portfolio would have a large cash and cash equivalents position reflecting the portfolio manager’s view regarding market conditions. The current amount of cash in the Portfolio has decreased the projected income of the Fund resulting in the lower dividend coverage and subsequently a grind on the Portfolio. The Pfd-2 rating of the Class B Preferred Securities is based primarily on the downside protection available, the Portfolio composition, as well as on the measures in place to protect the distributions to and repayment of the Class B Preferred Securities.

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.