DBRS Confirms Dividend 15 Split Corp. Preferred Shares Rating at Pfd-3

DBRS Limited (DBRS) has today confirmed the rating of the Preferred Shares issued by Dividend 15 Split Corp. (the Company) at Pfd-3.

In March 2004, the Company issued 8.4 million Preferred Shares at $10 each and an equal number of Class A Shares at $15 each. On June 16, 2016, the Company completed a follow-on offering by issuing 2,328,000 Preferred Shares and 2,328,000 Class A Shares, for a total of $47.7 million in gross proceeds. The proceeds will be invested in accordance with the Company’s investment objectives. The Preferred Shares were offered at a price of $10.00 per Preferred Share, to yield 5.25% on the issue price, and the Class A Shares were offered at a price of $10.50 per Class A Share, to yield 11.43% on the issue price. On maturity, the holders of the Preferred Shares will be entitled to the value of the Company, up to the face value of the Preferred Shares, in priority to the holders of the Class A Shares. Holders of the Class A Shares will receive the remaining value of the Company. The termination date for both classes of shares is December 1, 2019.

The funds from the offerings are invested in a portfolio of common shares (the Portfolio) issued by the following 15 core companies: Bank of Montreal, Bank of Nova Scotia, BCE Inc., CI Financial Corp., Canadian Imperial Bank of Commerce, Enbridge Inc., Manulife Financial Corporation, National Bank of Canada, Royal Bank of Canada, Sun Life Financial Inc., TELUS Corporation, Thomson Reuters Corporation, The Toronto-Dominion Bank, TransAlta Corporation and TransCanada Corporation. In addition, up to 15% of the net asset value (NAV) of the Portfolio may be invested in equity securities of issuers other than the companies listed above. The Portfolio is actively managed by Quadravest Capital Management Inc. Each underlying company in the Portfolio listed above generally represents no less than 3.5% and no more than 8% of the NAV of the Company. The Company has the ability to write covered call options or cash covered put options with respect to all or part of the common shares of the Portfolio to generate additional income to supplement the dividends received on the Portfolio.

Dividends received from the Portfolio are used to pay to holders of the Preferred Shares fixed cumulative monthly dividends in the amount of $0.04375 per Preferred Share (yielding 5.25% annually). Holders of Class A Shares receive monthly cash distributions targeted to be $0.10 per Class A Share.

The payment of the Class A Share distributions are projected to create an annual grind on the Portfolio NAV of approximately 5.77% over the next three years. No monthly distributions to the Class A Shares will be made if the dividends of the Preferred Shares are in arrears or if the NAV of the Company falls below 1.5 times the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions will be made if the NAV of the Company is below $25.

The amount of downside protection available to the Preferred Shares as of May 31, 2016, is 46.1%. The Preferred Share dividend coverage ratio is approximately 0.87 times.

One particular strength of the Portfolio is the consistency of dividend distributions of the underlying companies to date. Potential areas of concern include the Portfolio’s concentration in the financial services and insurance industries. In addition, volatility of prices and possible future changes in the dividend policies of the underlying companies in the Portfolio may result in reductions in downside protection and dividend coverage.

Based on these considerations and the aforementioned performance metrics, DBRS confirms the Pfd-3 rating of the Dividend 15 Split Corp. Preferred Shares.

DBRS will continue to closely monitor changes in the credit quality of the Preferred Shares. The timing of DBRS rating actions will generally follow the surveillance guidelines listed in DBRS’s split share methodology.

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 this industry, visit www.dbrs.com or contact us at info@dbrs.com.