DBRS Confirms Rating of Dividend 15 Split Corp. II Preferred Shares at Pfd-3 (low) Relating to Follow-On Offering

DBRS Limited (DBRS) has today confirmed the rating of the Preferred Shares (the Preferred Shares) issued by Dividend 15 Split Corp. II (the Company) at Pfd-3 (low). 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 that took place on December 14, 2016. The scheduled redemption date for both classes of shares issued is December 1, 2019 (the Termination Date). The board of directors may extend the Termination Date for further terms of five years each. 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 of common shares listed on the Toronto Stock Exchange (the Portfolio), which are issued by the following 15 companies: Bank of Montreal, Bank of Nova Scotia, BCE Inc., CI Financial Corp., Canadian Imperial Bank of Commerce, Enbridge Inc., Manulife Financial Corporation, National Bank of Canada, Royal Bank of Canada, Sun Life Financial Inc., TELUS Corporation, Thomson Reuters Corporation, The Toronto-Dominion Bank, TransAlta Corporation and TransCanada Corp. Up to 15% of the net asset value (the NAV) of the Portfolio may be invested in equity securities of issuers other than the above companies. The Portfolio is actively managed by Quadravest Capital Management Inc.

Dividends received from the Portfolio’s underlying common shares are used to pay fixed cumulative monthly cash distributions of $0.04375 per Preferred Share, yielding 5.25% annually on the original issue price of $10.00. Holders of the Class A Shares receive regular monthly cash dividends targeted to be $0.10 per Class A Share to yield 8% per annum on the original issue price of $15.00. No monthly distributions to the Class A Shares are made if the dividends of the Preferred Shares are in arrears or the NAV of the Company falls below 1.5 times the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions are made if the NAV of the Company is below $25.00. The Company has the ability to write covered call options and cash covered put options as well as purchase put options to generate additional income and supplement the dividends received on the Portfolio.

Since the last rating confirmation in January 2016, the NAV of the Company has seen some fluctuation; however, it has shown strong signs of recovery in the past two months. As of December 12, 2016, the downside protection available to the Preferred Shares was 37.9%, and the dividend coverage ratio was approximately 0.7 times. Regular monthly Class A Share distributions will result in an average grind of approximately 3.7% over the next three years.

The confirmation of the rating on the Preferred Shares at Pfd-3 (low) 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 NAV 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 and (2) the reliance on the Portfolio manager to generate additional income through methods such as option writing.

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.