DBRS Confirms Canadian Banc Corp. Preferred Shares Rating of Pfd-3 (high)

DBRS Limited (DBRS) confirmed the rating of the Preferred Shares issued by Canadian Banc Corp. (the Company) at Pfd-3 (high).

In July 2005, the Company raised gross proceeds of $288 million by issuing 11.5 million Preferred Shares at $10 each and an equal amount of Class A Shares at $15 each. Net proceeds from the offering were used to purchase a portfolio of common shares (the Portfolio) issued by the six largest Canadian banks: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and The Toronto-Dominion Bank. Each of the six banks represents between 5% and 20% of the net asset value (the NAV) of the Portfolio. In addition, up to 20% of the Portfolio’s NAV may be invested in equity securities of Canadian or foreign financial services corporations other than the aforementioned banks. In the latest secondary offering on December 23, 2016, the Company issued 393,602 additional units. One unit consists of one Preferred Share and one Class A Share. The termination date of the Preferred Shares is December 1, 2018.

Dividends received from the Portfolio are used to pay to holders of the Preferred Shares floating cumulative monthly dividends at a rate per annum equal to the prevailing prime rate in Canada (the Prime Rate) plus 0.75%, with a minimum annual rate of 5% and a maximum annual rate of 7%. Holders of Class A Shares are entitled to receive monthly cash distributions targeted to be 10% annually based on the volume-weighted average market price of the Class A Shares for last three trading days of the preceding month. On maturity, the holders of the Preferred Shares will be entitled to the value of the Portfolio, up to the face value of the Preferred Shares, in priority to the holders of the Class A Shares. The Class A Shareholders will receive the remaining value of the Company.

The monthly cash distributions to the holders of the Class A Shares will result in an average annual grind on the NAV of the Portfolio of approximately 4.1% in the next year. An asset coverage test in place mitigates the effects of the grind by not permitting the Company to make monthly distributions to the Class A Shares if the dividends of the Preferred Shares are in arrears or if the NAV of the Portfolio falls below 1.5 times the principal amount of the outstanding Preferred Shares. In addition, no special distributions can be made to the Class A Shares if, after such distributions, the NAV is below $25. This ensures a sufficient level of protection to the holders of the Preferred Shares.

The main form of credit enhancement available to the Preferred Shares is a buffer of downside protection. The amount of downside protection available to the Preferred Shares as of July 31, 2017, was 54.5%. The Preferred Share dividend coverage ratio was approximately 0.9 times.

Although the credit quality of the underlying assets of the Portfolio is strong, the Portfolio is concentrated in the financial services industry. The floating nature of dividend distributions to Preferred Shares and Class A Shares, although mitigated by predetermined ranges of dividend yields, may potentially increase the volatility of the protection available to holders of the Preferred Shares in a high interest rate environment.

Based on these considerations and aforementioned performance metrics, DBRS confirms the Pfd-3 (high) rating of the Canadian Banc Corp. Preferred Shares.

DBRS will continue to closely monitor changes in the credit quality of the Preferred Shares. The timing of DBRS rating actions will generally follow the surveillance guidelines listed in DBRS’s split share methodology.

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 principal methodology is Rating Canadian Split Share Companies and Trusts (July 2017), which can be found on our website under Methodologies.