DBRS Confirms BNS Split Corp. II Class B Preferred Shares at Pfd-2

DBRS Limited (DBRS) confirmed the Class B Preferred Shares, Series 2 (the Preferred Shares) rating of BNS Split Corp. II (the Company) at Pfd-2. The Preferred Shares were issued in September 2015 following a reorganization of the Company at an issue price of $19.71 each. The redemption date of the Preferred Shares is September 22, 2020.

The Company holds a portfolio (the Portfolio) of common shares of Bank of Nova Scotia (BNS) (rated AA, Negative trend by DBRS). The dividends received from the Portfolio are used to pay fixed cumulative quarterly distributions to the holders of the Preferred Shares in the amount of $0.1971 per quarter, representing 4.0% per annum on the issue price. Excess dividends net of all expenses of the Company, after the preferred cumulative dividends have been paid to the holders of the Preferred Shares, may be paid as dividends on the Capital Shares or re-invested by the Company in additional BNS Shares as determined by the board of directors of the Company. The distributions of dividends on the Preferred Shares may be additionally funded from the sale of the underlying shares. The Company may engage in securities lending to supplement the income generated by the dividends.

As of August 17, 2017, the downside protection was 71.4%. An increase in dividend distributions from BNS helped boost the dividend coverage ratio, which is approximately 2.8 times. Taking into consideration the dividend coverage, the amount of downside protection available and the absence of the grind on the Portfolio, the rating of the Preferred Shares has been confirmed at Pfd-2.

The main constraints to the final rating are the following:

(1) The downside protection available to holders of the Preferred Shares depends on the value of common shares of BNS and is subject to share price volatility.
(2) Changes in dividend policy of BNS may result in fluctuations in dividend coverage or downside protection from time to time.
(3) The Portfolio is entirely concentrated in the common shares of BNS.

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 can be found at: http://www.dbrs.com/about/methodologies.