DBRS Upgrades Brompton Lifeco Split Corp. Preferred Shares to Pfd-3 (low)

DBRS Limited (DBRS) upgraded the rating of the Preferred Shares issued by Brompton Lifeco Split Corp. (the Company) to Pfd-3 (low) from Pfd-4 (high).

The Company holds a portfolio (the Portfolio) consisting of common shares of the four-largest publicly traded Canadian life insurance companies: Great-West Lifeco Inc., Sun Life Financial Inc., Manulife Financial Corporation and Industrial Alliance Insurance and Financial Services Inc. The Portfolio is approximately equally weighted and is subject to annual rebalancing. The Preferred Shares are entitled to receive fixed cumulative, quarterly distributions in the amount of $0.14375 per preferred share, yielding 5.75% annually on the issue price of $10.00 per share. Holders of the Class A Shares receive regular monthly cash distributions targeted at $0.075 per share, yielding 6% annually on the original issue price of $15.00 per share. No monthly distributions on the Class A Shares will be made if the Preferred Share distributions are in arrears or if the net asset value (NAV) of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions in excess of $0.075 per month will be made if the NAV of the Company is below $25.00.

The maturity date for both classes of shares is April 29, 2019. On maturity, the holders of the Preferred Shares will be entitled to the value of the Company up to the face value of the Preferred Shares. Holders of the Class A Shares will receive the remaining value of the Company. The term of the Company may be extended beyond the maturity date for additional terms of five years each as determined by the Company’s board of directors.

The Company has the ability to write covered-call options or cash-covered put options with respect to all or part of the common shares of the Portfolio and may also engage in securities lending to generate additional income to supplement the dividends received on the Portfolio. Based on the dividend yields of the underlying companies in the Portfolio and after management fees and other expenses have been paid, the dividend coverage ratio stands at 0.6x.

The main form of credit enhancement available to the Preferred Shares is a buffer of downside protection. Downside protection corresponds to the percentage decline in market value of the Portfolio that must be experienced before the Preferred Shares would be in a loss position. Since the last review, the amount of downside protection available to the Preferred Shares has increased to 39.8% posting a 5.4% gain as of October 12, 2017. The growth in downside protection was a combination of a price appreciation and a dividend payout increase of the underlying shares of the Portfolio as well as additional income generated from option writing.

In its analysis, DBRS has considered the current level and behaviour of downside protection of the Company. Some other important rating considerations were the credit quality, volatility and diversification of the Portfolio as well as changes in dividend policies of the underlying companies in the Portfolio. Based on these considerations and performance metrics, DBRS upgrades the rating of the Preferred Shares issued by Brompton Lifeco Split Corp. to Pfd-3 (low) from Pfd-4 (high).

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 dbrs.com under Methodologies.

The rated entity or its related entities participated in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.