DBRS Upgrades 5Banc Split Inc. Class C Preferred Shares, Series 1 to Pfd-2 (high)

DBRS Limited (DBRS) has today upgraded the rating of Class C Preferred Shares, Series 1 (the Preferred Shares) issued by 5Banc Split Inc. (the Company) to Pfd-2 (high).

The Preferred Shares were issued as part of a share capital reorganization, where the Company redeemed all outstanding Class B Preferred Shares and approximately 1.59 million Class B Capital Shares (the Capital Shares) belonging to shareholders who elected to exercise a Special Retraction Right on December 15, 2011. The redemption date for the Preferred Shares was set to December 15, 2016. The Company will be redeeming all outstanding Preferred Shares and the Capital Shares on December 15, 2016, as was confirmed in a press release on October 31, 2016.

The Company holds a portfolio of common shares of the big five Canadian chartered banks (the Portfolio): Royal Bank of Canada, Canadian Imperial Bank of Commerce, Bank of Nova Scotia , Bank of Montreal and The Toronto-Dominion Bank. The Portfolio was initially rebalanced to an equally-weighted position among the five banks after the reorganization. Currently, the Portfolio is not actively traded.

Dividends received from the Portfolio are used to pay a quarterly fixed, cumulative, preferential distribution in the amount of $0.11875 per Preferred Share to yield 4.75% per annum. As of November 3, 2016, the downside protection was approximately 72%. Based on the dividend yield on the underlying Portfolio holdings as of November 3, 2016, the Preferred Share dividend coverage ratio was approximately 2.5 times (x). The Company’s excess dividends, net of all expenses, may be distributed to the holders of the Capital Shares. The Company may engage in securities lending. Shortfalls are expected to be funded through the sale of Portfolio securities.

On the maturity date, the holders of the Preferred Shares will be entitled to the value of the Portfolio, up to the face value of the Preferred Shares, in priority to the holders of the Capital Shares. Holders of the Capital Shares will be entitled to the remaining value of the Portfolio.

Some challenges considered in this rating are:
-- Price volatility and diversification of the Portfolio, which is concentrated in one industry.
-- Potential changes in the dividend policies of the underlying companies in the Portfolio.
-- Dependence of the protection provided to holders of the Preferred Shares on the value of common shares of the Portfolio.

The strengths include:
-- Strong credit quality of the underlying portfolio holdings.
-- A dividend coverage ratio greater than 1.0x.
-- The amount of downside protection available.

Based on the aforementioned considerations and performance metrics, DBRS has upgraded the rating of the Class C Preferred Shares, Series 1 issued by 5Banc Split Inc. to Pfd-2 (high).

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 (June 2016), 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.