DBRS Upgrades Rating of Allbanc Split Corp. II Class B Preferred Shares, Series 2 to Pfd-2 from Pfd-2 (low)

DBRS Limited (DBRS) has today upgraded the rating on the Class B Preferred Shares, Series 2 (the Series 2 Preferred Shares) issued by Allbanc Split Corp. II (the Company) to Pfd-2 from Pfd-2 (low). In February 2016, the Company offered 687,567 Series 2 Preferred Shares at $25.67 each as part of a share reorganization. The Series 2 Preferred Shares were issued to maintain the leveraged split share structure of the Company so that the number of issued and outstanding Class A Capital Shares is twice the number of issued and outstanding Series 2 Preferred Shares. The maturity date for the Series 2 Preferred Shares is February 28, 2021.

The Company holds a portfolio (the Portfolio) of publicly listed common shares of Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank (collectively, the Portfolio Shares) in order to generate dividend income for the holders of the Series 2 Preferred Shares and to enable holders of the Class A Capital Shares to participate in any capital appreciation in the Portfolio Shares. In order to generate additional income, the Company may engage in securities lending and covered call option writing.

The dividends received from the Portfolio are used to pay a fixed cumulative quarterly distribution of $0.3048 per share to holders of the Series 2 Preferred Shares, yielding approximately 4.75% annually on the issue price. The current yield on the Portfolio shares fully covers the Series 2 Preferred Share dividends, providing dividend coverage of approximately 1.5 times (x). The Class A Capital Shares are expected to receive all excess dividend income after the Series 2 Preferred Share distributions and other expenses of the Company have been paid.

In the past year, the downside protection available to the Series 2 Preferred Shares, although being volatile, has been gradually increasing, reaching approximately 67.7% as of February 16, 2017. Taking into consideration this increase in the downside protection, dividend coverage above 1x, as well as strong Portfolio credit quality and consistency of dividend distributions of the Portfolio holdings, DBRS has upgraded the rating on the Series 2 Preferred Shares issued by Allbanc Split Corp. II to Pfd-2.

The main constraints to the rating are the following:

(1) The downside protection provided to holders of the Series 2 Preferred Shares is dependent on the value of the shares in the Portfolio.

(2) Volatility of price and changes in the dividend policies of the Portfolio Shares may result in significant reductions in downside protection from time to time.

(3) The entire Portfolio is concentrated in the Canadian financial services industry.

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.