DBRS Confirms Financial 15 Split Corp. Preferred Shares at Pfd-4 (high) Relating to Follow-On Offering

DBRS Limited (DBRS) has today confirmed the rating of the Preferred Shares (the Preferred Shares) issued by Financial 15 Split Corp. (the Company) at Pfd-4 (high). The rating confirmation is being provided in relation to the execution of the overnight offering of additional Preferred Shares and Class A Shares of the Company (the November Follow-On Offering) that took place on December 2, 2016. Subsequent to the initial public offering in 2003, this is the fourth follow-on offering completed by the Company. The scheduled redemption date for both classes of shares is December 1, 2020. At maturity, the holders of the Preferred Shares will be entitled to the value of the Company, up to the face amount 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 Company holds a portfolio (the Portfolio) consisting primarily of common shares of 15 high-quality North American financial services companies: Bank of America Corporation, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, CI Financial Corp., Citigroup Inc., The Goldman Sachs Group Inc., Great-West Lifeco Inc., JP Morgan Chase & Co., Manulife Financial Corporation, National Bank of Canada, Royal Bank of Canada, Sun Life Financial Inc., Toronto-Dominion Bank and Wells Fargo & Company (collectively, the Portfolio Companies). In addition, up to 15% of the net asset value (NAV) of the Company may be invested in securities of issuers other than those mentioned above. These issuers include AGF Management Limited as of May 31, 2016. The common shares of a particular Portfolio Company each represent between 4% and 8% of the total NAV of the Company. No more than 10% of the NAV of the Company may be invested in any single issuer. The Portfolio is actively managed by Quadravest Capital Management Inc.

A portion of the Company’s Portfolio is exposed to currency risk as it includes securities and options denominated in U.S. dollars (USD), while the NAV of the Company is expressed in Canadian dollars. The Company has not entered into currency hedging contracts for the USD portion of the Portfolio, although the Company may use derivatives for hedging purposes. As of May 31, 2016, approximately 32% of the Portfolio was invested in USD-denominated assets.

The Preferred Shares pay a fixed cumulative monthly dividend of $0.04375 per Preferred Share, yielding 5.25% annually on their issue price of $10 per share. Holders of the Class A Shares receive regular monthly cash distributions in an amount to be determined by the board of directors. No regular monthly distributions will be paid to the Class A Shares if the NAV per unit is below the $15 threshold or if any dividends on the Preferred Shares are in arrears.

Downside protection available to holders of the Preferred Shares was 40.5% as of November 15, 2016. The dividend coverage ratio was 0.6 times. Regular monthly Class A Share distributions will result in an average grind of approximately 6.8% over the next four years. The confirmation of the rating on the Preferred Shares at Pfd-4 (high) is based primarily on the current downside protection available and the minimum downside protection provided by an asset coverage test, which does not permit any distributions to holders of Class A Shares if the net asset value of the Company falls below $15.00.

The main constraints on the rating are (1) the Company’s dependence on the value and dividend policies of the securities in the Portfolio, (2) the reliance on the Portfolio manager to generate additional income through methods such as option writing, and (3) the unhedged portion of the USD-denominated Portfolio that exposes the Portfolio to foreign currency risk.

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.