DBRS Confirms Life & Banc Split Corp. Preferred Shares at Pfd-3

DBRS Limited (DBRS) confirmed the rating on the Preferred Shares issued by Life & Banc Split Corp. (the Company) at Pfd-3. The Company invests in a portfolio of common shares (the Portfolio) issued by the six major banks in Canada (Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and The Toronto-Dominion Bank) and four Canadian life insurance companies (Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc., Manulife Financial Corporation and Sun Life Financial Inc.). The Portfolio is approximately equally weighted and rebalanced at least annually.

Dividends received from the Portfolio are used to pay each holder of the Preferred Shares fixed cumulative quarterly dividends that are equal to 4.75% per annum of the original issue price of $10.00 per share. Holders of Class A Shares receive monthly distributions targeted at $0.10 per share. As protection to the holders of the Preferred Shares, an asset coverage test does not permit the Company to make monthly distributions to the Class A Shares if the dividends of the Preferred Shares are in arrears or the net asset value (NAV) of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. In addition, no special distributions can be made to the Class A Shares if, after such distribution, the NAV of the Portfolio is below $25.

The Company has the ability to write covered call options or engage in securities lending with respect to the common shares of the Portfolio to generate additional income in order to supplement dividend distributions. Securities lending exposes the Portfolio to the risk of loss if the borrower defaults on its obligations to return the borrowed securities and if the collateral is insufficient to reconstitute the portfolio of loaned securities.

On September 25, 2017, the Company announced an extension of the term for both classes of shares for an additional five years to October 30, 2023. The Preferred Share dividend rate will be announced at least 60 days prior to November 29, 2018. At maturity, the holders of the Preferred Shares will be entitled to the value of the Company up to the face amount of the Preferred Shares in priority to the holders of the Class A Shares. Holders of the Class A Shares will receive the remaining value of the Company. The board of directors may extend the Company’s share term by successive terms of up to five years provided that shareholders are given an optional retraction right at the end of each successive term.

Further, on October 4, 2017, the Company completed an additional overnight offering, raising approximately $81.6 million in gross proceeds. The new outstanding amount of each class of shares is $22.4 million.

The downside protection available to the Preferred Shares experienced a few minor declines throughout the year. It has recovered since then to 50.2% as at November 9, 2017. The dividend coverage ratio was about 1.0x. Taking into consideration the credit quality, volatility and diversification of the Portfolio; the term extension and possible Preferred Shares dividend change; and the amount of downside protection available to the Preferred Shares, DBRS confirms the rating on the Preferred Shares issued by the Company at Pfd-3.

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 did 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.