DBRS Confirms S Split Corp. Preferred Shares at Pfd-3

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

In May 2007, the Company raised gross proceeds of $118.75 million by issuing 4.75 million Preferred Shares at $10 each and an equal number of Class A Shares at $15 each. One unit thus consists of one Preferred Share and one Class A Share. The redemption date for both classes of shares issued is November 30, 2021. On the redemption date, the holders of the Preferred Shares will have priority over the holders of the Class A Shares with respect to return of capital and distributions. After the holders of the Preferred Shares are fully paid, the holders of the Class A Shares will receive the remaining value of the Company.

The net proceeds from the initial offering were used to purchase a portfolio of common shares of the Bank of Nova Scotia (the BNS Shares). Dividends received from the BNS Shares are used to pay a fixed cumulative monthly dividend to the holders of the Preferred Shares equal to 5.25% per annum. The Company aims to provide the holders of the Class A Shares with regular monthly cash distributions in an amount targeted to be 6% per annum on the net asset value (the NAV) of the Class A Shares. No distributions will be paid to the Class A Shares if the asset coverage available to the Preferred Shares falls below 1.65 times (x). Furthermore, no special distributions will be paid to the Class A Shares if such payments reduce the Company’s NAV to less than $25; however, special distributions may be made to mitigate any potential tax liabilities to the Company.

The Company employs the Strathbridge Selective Overwriting proprietary options strategy to supplement the dividend income earned on the BNS Shares. The Company may also write cash covered put options on the BNS Shares to generate additional returns. In addition, the Company may invest up to 10% of its net assets to purchase call options in respect of securities in which the Company is permitted to invest.

As of November 23, 2016, the amount of downside protection available to the Preferred Shares is approximately 44%. Based on the Portfolio yield, the dividend coverage is approximately 0.3x. The Class A Shares distributions will result in an average annual grind on the NAV of approximately 3.3% for the next five years.

The primary constraints to the rating are the Company’s dependence on the value of the BNS Shares, the price volatility and concentration of the entire portfolio in the BNS Shares, and the potential impact of changes in Bank of Nova Scotia’s dividend policy on the common shares.

Based on the aforementioned considerations, the amount of downside protection available, and the expected grind on the Portfolio, DBRS confirms the Pfd-3 rating of the Preferred Shares issued by S Split Corp.

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.