DBRS Confirms Rating on Faircourt Split Trust 6.00% Preferred Securities at Pfd-3 (low)

DBRS Limited (DBRS) has today confirmed the rating of Pfd-3 (low) on the 6.00% Preferred Securities (the Preferred Securities) issued by Faircourt Split Trust (the Trust).

On December 30, 2014, the Trust completed a reorganization during which 1.5 million of the 6.00% Preferred Securities were issued at a price of $10.00 per Preferred Security for a total of $15 million in gross proceeds and all of the 6.25% preferred securities were fully redeemed. The maturity date for the 6.00% Preferred Securities is June 30, 2019.

The net assets of the Trust are invested in a portfolio of broadly diversified North American equities and income-producing securities, including but not limited to dividend-paying equities, income fund securities, income-producing securities and short-term investments (the Portfolio). As of June 30, 2016, the Portfolio was composed of the following assets: Cash and Short-Term Investments (18.24%), Financials (9.0%), Consumer Discretionary/Staples (23.61%), Real Estate Investment Trusts (22.06%), Industrials (12.57%), Information Technology (5.7%), Utilities (3.07%) and Health Care (5.41%). The blended benchmark for the Trust comprises a 70% weight in the S&P/TSX Composite Total Return Index and a 30% weight in the S&P 500 – CDN Total Return Index.

The Portfolio generally consists of equities and securities of Canadian issuers, but up to 40% may include equities and securities of non-Canadian issuers, provided that 70% of the Portfolio remains denominated in or hedged back to Canadian dollars at all times. No more than 10% of the Portfolio may consist of securities of a single issuer with the exception of the Government of Canada, a Canadian province or a Canadian municipality.

Holders of the Preferred Securities receive fixed quarterly preferred interest payments of $0.15 per security to yield 6.00% annually on the issue price of $10.00. Holders of the Trust Units (the Trust Units) receive regular monthly distributions in the amount of $0.04. These distributions, however, are subject to change at the Trust’s discretion, prevailing market conditions and the Trust’s asset coverage test. All distributions made to holders of the Trust Units are subordinated to the distributions made to holders of the Preferred Securities. The asset coverage test does not permit any cash distributions to the unitholders if, after giving effect to the proposed distribution, the total assets of the Portfolio would be less than 1.4 times the outstanding principal amount of the Preferred Securities.

The main form of credit enhancement available to the Preferred Securities is a buffer of downside protection. The downside protection corresponds with the percentage decline in the Portfolio’s market value that must be experienced before the Preferred Securities would be in a loss position. As of December 8, 2016, the downside protection available to holders of the Preferred Securities was approximately 30.8%. The Preferred Securities distributions will result in an average annual grind on the net asset value of 3.8% in the next 2.5 years. The Trust has the ability to (1) write covered calls on the common shares held in the Portfolio and cash-secured put options to generate additional income and (2) supplement the yield earned on the Portfolio, in which it currently actively engages.

The main constraints to the rating are the following:

(1) The downside protection available to holders of the 6.00% Preferred Securities will depend on the value of securities held in the Portfolio.
(2) Volatility of prices and changes in the dividend policies of the underlying issuers may result in significant reductions in interest coverage or downside protection from time to time.
(3) Reliance on the manager to generate a high yield on the investment portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

Based on these considerations and performance metrics, DBRS confirms the Pfd-3 (low) rating of the Preferred Securities issued by Faircourt Split Trust.

DBRS will continue to monitor the situation in connection with the ongoing surveillance of the rating on the 6.00% Preferred Securities and will take appropriate ratings action as necessary.

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.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.