DBRS Confirms Big 8 Split Inc. Class D Preferred Shares, Series 1 at Pfd-2

DBRS Limited (DBRS) confirmed the rating of Class D Preferred Shares, Series 1 (the Preferred Shares) issued by Big 8 Split Inc. (the Company) at Pfd-2.

The Company invested in a portfolio (the Portfolio) consisting of common shares of Bank of Montreal (rated AA, Negative trend, by DBRS), Bank of Nova Scotia (rated AA, Negative trend, by DBRS), Canadian Imperial Bank of Commerce (rated AA, Negative trend, by DBRS), Royal Bank of Canada (rated AA, Stable trend, by DBRS), The Toronto-Dominion Bank (rated AA, Stable trend, by DBRS), Great-West Lifeco Inc. (rated A (high), Stable trend, by DBRS), Manulife Financial Corporation (rated A, Stable trend, by DBRS) and Sun Life Financial Inc. (rated A, Stable Trend, by DBRS). The Portfolio is approximately equally weighted and is not actively traded.

Dividends received from the Portfolio are used to pay fixed-cumulative quarterly distributions to holders of the Preferred Shares, yielding 4.50% per annum on the initial issue price of $10.00. The Class D Capital Shares (the Capital Shares) receive excess dividend income after the Preferred Share distributions, and other Company expenses have been paid. Based on the current dividend yield on the Portfolio, the Preferred Share dividend coverage ratio is approximately 1.7 times, and as such, there is no grind on the portfolio. In order to generate additional returns, the Company has the ability to engage in securities lending. There is an equal number of the Preferred Shares and the Capital Shares outstanding.

Downside protection available to the Preferred Shares consists of the net asset value of the Capital Shares. As of November 2, 2017, the downside protection was approximately 65.4%. On the maturity date, the holders of the Preferred Shares will be entitled to the repayment of principal and any accrued dividends in priority to the Capital Shares. The Capital Shares will be entitled to the remaining value of the Portfolio, including all capital appreciation. Both classes of shares are scheduled to mature on December 15, 2018.

A primary constraint to the rating is the Company’s dependence on the value of the underlying common shares of the Portfolio. Other constraints include the impact of possible changes in dividend policies of the underlying companies in the Portfolio and the concentration of the entire Portfolio in the Canadian financial services industry. Taking into consideration the consistency of dividend distributions and dividend increase of the underlying common shares in the Portfolio, strong credit quality of the Portfolio holdings, as well as the amount of the downside protection available, DBRS confirmed the rating of the Class D Preferred Shares, Series 1 issued by the Company at Pfd-2.

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, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate 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.