DBRS Upgrades Brompton Life & Banc Split Corp. Preferred Shares to Pfd-3

DBRS Limited (DBRS) has today upgraded the rating on the Preferred Shares issued by Life & Banc Split Corp. (the Company) to Pfd-3. In October 2006, the Company raised gross proceeds of $300 million by issuing 12 million Preferred Shares at $10 each and an equal number of Class A Shares at $15 each. Since then, the Company has completed several additional treasury offerings. The redemption date for both classes of shares issued is November 29, 2018. The board of directors may extend the Company’s term and the shares by successive terms of up to five years, provided that shareholders are given an optional retraction right at the end of each successive term.

The Company invests in a portfolio of common shares (the Portfolio) issued by the six major banks in Canada (Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and The Toronto-Dominion Bank) and four Canadian life insurance companies (Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc., Manulife Financial Corporation and Sun Life Financial Inc.). The Portfolio was initially equally weighted. It is rebalanced at least annually.

The Company has the ability to write covered call options or engage in securities lending with respect to the common shares of the Portfolio to generate additional income to supplement the dividends received on the Portfolio. Securities lending exposes the Portfolio to the risk of loss if the borrower defaults on its obligations to return the borrowed securities and if the collateral is insufficient to reconstitute the portfolio of loaned securities.

Dividends received from the Portfolio are used to pay each holder of the Preferred Shares fixed cumulative quarterly dividends equal to 4.75% per annum (p.a.) on the original issue price of $10.00 per share. Holders of Class A Shares receive monthly distributions targeted at $0.10 per share. As protection to the holders of the Preferred Shares, an asset coverage test does not permit the Company to make monthly distributions to the Class A Shares if the dividends of the Preferred Shares are in arrears or if the net asset value (NAV) of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. In addition, no special distributions can be made to the Class A Shares if, after such distribution, the NAV of the Portfolio is below $25.

Although the performance of the Portfolio has experienced some volatility over the past year, the downside protection has shown a steady recovery in the last four months. It stands at 47.7% as of November 17, 2016. The dividend coverage ratio is about 1.1 times (x).

Some important rating considerations are the credit quality, volatility and diversification of the Portfolio; possible changes in dividend policies of the underlying companies in the Portfolio; and the amount of downside protection available to the Preferred Shares. Based on these considerations and performance metrics, DBRS upgrades the rating on the Preferred Shares issued by Brompton Life & Banc Split Corp. to Pfd-3.

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.