DBRS Confirms Financial 15 Split Corp. Preferred Shares at Pfd-4 (high)

DBRS Limited (DBRS) confirmed the rating of the Preferred Shares issued by Financial 15 Split Corp. (the Company) at Pfd-4 (high). The Company invests in a portfolio (the Portfolio) consisting primarily of common shares of 15 high-quality North American financial services companies: Bank of America Corporation, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, CI Financial Corp., Citigroup Inc., The Goldman Sachs Group Inc., Great-West Lifeco Inc., JP Morgan Chase & Co., Manulife Financial Corporation, National Bank of Canada, Royal Bank of Canada, Sun Life Financial Inc., The Toronto-Dominion Bank, and Wells Fargo & Company. In addition, up to 15% of the net asset value (NAV) of the Company may be invested in securities of issuers other than those mentioned above. These issuers include Fifth Third Bancorp and AGF Management as of May 31, 2017. The common shares of a particular Portfolio Company each represent between 1.2% and 8.9% of the total NAV of the Company. No more than 10% of the NAV of the Company may be invested in any single issuer. The Portfolio is actively managed by Quadravest Capital Management Inc.

A portion of the Company’s Portfolio is exposed to currency risk, as it includes securities and options denominated in U.S. dollars (USD), while the NAV of the Company is expressed in Canadian dollars. The Company has not entered into currency hedging contracts for the USD portion of the Portfolio, although the Company may use derivatives for hedging purposes. As of May 31, 2017, approximately 40% of the Portfolio was invested in USD-denominated assets.

The Preferred Shares dividend increased by 25 basis points as of December 1, 2017, to pay a fixed cumulative monthly dividend of $0.04583 per share, yielding 5.50% annually on their issue price of $10 per share. Holders of the Class A Shares continue to receive regular monthly cash distributions in an amount to be determined by the board of directors. No regular monthly distributions will be paid to the Class A Shares if the NAV per unit is below the $15 threshold or if any dividends on the Preferred Shares are in arrears. The dividend coverage ratio is expected to be 0.4 times after the dividend increase on the Preferred Shares. Regular monthly Class A Share distributions will result in an average annual grind of approximately 8% over the next three years.

Downside protection available to holders of the Preferred Shares was 44.3% as of November 15, 2017. Over the past year, the downside protection remained volatile with several distinct increases that permitted the Company to complete three follow-on offerings during these times. The latest offering was completed on November 15, 2017, bringing the total number of each class of shares to approximately 33.3 million and the Company’s net assets to $596.3 million.

The scheduled redemption date for both classes of shares is December 1, 2020. 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 confirmation of the rating on the Preferred Shares at Pfd-4 (high) is based on the downside protection available and its performance, the Preferred Share dividend increase, and other Portfolio metrics discussed above. The main constraints on the rating are (1) the reliance on the Portfolio manager to generate additional income through methods such as option writing, (2) the stated monthly cash distributions to holders of the Class A shares and (3) the unhedged portion of the USD-denominated Portfolio that exposes the Portfolio to foreign currency risk.

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 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.