DBRS Upgrades Brookfield Soundvest Split Trust Preferred Securities to Pfd-5 (high) from Pfd-5

DBRS Limited (DBRS) has today upgraded the rating on the Preferred Securities issued by Brookfield Soundvest Split Trust (the Trust) to Pfd-5 (high) from Pfd-5.

In March 2005, the Trust raised gross proceeds of $180 million by issuing 7.2 million Preferred Securities (at $10 each) and an equal number of Capital Units (at $15 each). On March 27, 2015, unitholders of the Trust voted to extend the term of the fund by five years. The new maturity is March 31, 2020.

The net proceeds from the initial offering were invested in a diversified portfolio of Canadian income trusts (the Portfolio). Eligible investments of the Trust currently include common shares and preferred shares, income trusts, income securities (including bonds and debentures), real estate investment trusts (REITs), Canadian mortgage-backed securities and other equity securities. The Trust may engage in securities lending to generate additional income.

Holders of the Preferred Securities receive fixed quarterly interest payments yielding 6.0% annually. The Capital Units are expected to receive regular monthly cash distributions, subject to the Preferred Security asset coverage ratio being greater than 1.4 times. The Capital Unit distributions were suspended in August 2011 for the reason of the asset coverage test not being met.

Based on the latest Portfolio’s yield, the Preferred Securities distribution coverage ratio is approximately 0.4 times. The insufficient amount of Portfolio dividends to cover Preferred Security distributions is projected to create an average annual grind on the Portfolio of approximately 3.3% in the next three years.

As at March 2, 2017, the downside protection available to the Preferred Securities was approximately 17.4%, which represents a gain of about 10% compared to the downside protection amount recorded a year ago. The downside protection has exhibited relative stability in the past four months, settling in the high-teens figures. Nevertheless, it remains subject to volatility, as it depends on the value of underlying securities of the Portfolio. The amount of downside protection and projected grind until the expected end of the term warrant an upgrade of the rating on the Preferred Securities issued by the Trust to Pfd-5 (high).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Split Share Companies and Trusts (June 2016), which can be found on our website under Methodologies.

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