DBRS Confirms Partners Value Split Corp. Class AA Preferred Shares at Pfd-2 (low)

DBRS Limited (DBRS) has today confirmed the Pfd-2 (low) ratings of the Class AA Preferred Shares, Series 3; Class AA Preferred Shares, Series 5; the Class AA Preferred Shares, Series 6; and the Class AA Preferred Shares, Series 7 (collectively, the Class AA Preferred Shares) issued by Partners Value Split Corp. (the Company).

The Class AA Preferred Shares, Series 7 were issued on October 29, 2015. The proceeds were used to redeem the Class AA Preferred Shares, Series 1 on March 28, 2016.

The Company owns a portfolio (the Portfolio) of Class A Limited Voting Shares (the BAM Shares) of Brookfield Asset Management Inc. (BAM; rated A (low), Stable by DBRS). Dividends received from the Portfolio are used to fund the payment of interest on the Debentures to the extent that any have been issued, and to fund the payment of dividends on the Class AA Preferred Shares. As of June 30, 2016, there were no debentures outstanding. Holders of the Junior Preferred Shares, Series 1 (the Junior Preferred Shares) are entitled to receive quarterly noncumulative cash distributions at an annual rate of 5% when declared by the board of directors. Holders of the capital shares (the Capital Shares) of the Company will only receive excess dividend income after interest on the Debentures, Class AA Preferred Share distributions, Junior Preferred Share distributions and other Company expenses have been paid. Any capital appreciation of the BAM Shares will benefit the holders of the Capital Shares.

All series of Class AA Preferred Shares rank senior to the Capital Shares, the Class AAA Preferred Shares and the Junior Preferred Shares and pari passu with all other Class AA Preferred Shares with respect to payment of dividends and repayment of principal.

A limited number of Class A Voting Shares have been issued by the Company that rank senior to the Class AA Preferred Shares in respect of capital upon the dissolution, winding up or insolvency of the Company. As of June 30, 2016, there were $100 worth of such shares outstanding.

As of September 30, 2016, the downside protection available to the Class AA Preferred Shares was approximately 83% and the dividend coverage ratio was 1.9 times (based on the Canadian dollar and U.S. dollar exchange rate as of October 24, 2016). BAM declares its dividends in U.S. dollars, which represents the risk that an appreciating Canadian dollar will cause the dividend coverage ratio to fall below 1.0 times. In the event of a shortfall, the Company may sell some of the BAM Shares, engage in security lending or write covered call options to generate sufficient income to satisfy its obligations to pay the Class AA Preferred Share dividends. If the Company chooses to lend its holdings, the Portfolio would be exposed to the potential losses in the event that the borrower defaults on its obligations to return the borrowed securities.

The main constraints to the ratings are as follows:

(1) The downside protection available to holders of the Class AA Preferred Shares depends solely on the market value of the BAM Shares held in the Portfolio, which will fluctuate over time.

(2) There is a lack of diversification, as the Portfolio is entirely made up of BAM Shares.

(3) Changes in the dividend policy of BAM may result in reductions in Class AA Preferred Shares dividend coverage.

(4) As BAM declares dividends in U.S. dollars, the Company is exposed to foreign currency risk relating to the Canadian-U.S. exchange rate, specifically the appreciation of the Canadian dollar versus the U.S. dollar. This may have a negative impact on the dividend coverage ratio of the Class AA Preferred Shares, as these dividends are paid in Canadian dollars.

(5) Downside protection available to the Class AA Preferred Shares may be negatively affected by the retraction of the Junior Preferred Shares.

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

The applicable methodology is Rating Canadian Split Share Companies and Trusts, 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.