DBRS Confirms Rating of Dividend 15 Split Corp. II Preferred Shares at Pfd-3 (low)

DBRS Limited (DBRS) confirmed the rating of the Preferred Shares issued by Dividend 15 Split Corp. II (the Company) at Pfd-3 (low). The Company holds a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio), which are issued by the following 15 companies:

-- Bank of Montreal (rated AA with a Stable trend by DBRS)
-- The Bank of Nova Scotia (rated AA with a Negative trend by DBRS)
-- BCE Inc. (rated BBB with a Stable trend by DBRS)
-- CI Financial Corp. (rated A (low) with a Stable trend by DBRS)
-- Canadian Imperial Bank of Commerce (rated AA with a Negative trend by DBRS)
-- Enbridge Inc. (rated BBB (high) with a Stable trend by DBRS)
-- Manulife Financial Corporation (rated A with a Stable trend by DBRS)
-- National Bank of Canada (rated AA (low) with a Negative trend by DBRS)
-- Royal Bank of Canada (rated AA with a Stable trend by DBRS)
-- Sun Life Financial Inc. (rated A with a Stable trend by DBRS)
-- TELUS Corporation (rated BBB (high) with a Stable trend by DBRS)
-- Thomson Reuters Corporation (rated BBB (high) with a Stable trend by DBRS)
-- The Toronto-Dominion Bank (rated AA with a Stable trend by DBRS)
-- TransAlta Corporation (rated BBB (low) with a Stable trend by DBRS)
-- TransCanada Corporation (rated Pdf-2 (low) with a Stable trend by DBRS)

Up to 15% of the net asset value (NAV) of the Portfolio may be invested in equity securities of issuers other than the companies listed above. The Portfolio is actively managed by Quadravest Capital Management Inc.

Dividends received from the Portfolio’s underlying common shares are used to pay fixed cumulative monthly cash distributions of $0.04375 per Preferred Share, yielding 5.25% annually on the original issue price of $10.00. Holders of the Class A Shares receive regular monthly cash dividends targeted at $0.10 per Class A Share, yielding 8% per annum on the original issue price of $15.00. No monthly distributions to the Class A Shares are made if the dividends of the Preferred Shares are in arrears, or if the NAV of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions are made if the NAV of the Company is below $25.00. The Company has the ability to write covered call options in respect of some, or all of the common, shares held in the Portfolio to generate additional income and supplement the dividends received on the Portfolio.

As at December 15, 2017, the downside protection available to the Preferred Shares was 36.1%. The dividend coverage ratio was approximately 0.7x. Regular monthly Class A Share distributions will result in an average grind of approximately 5% over the next two years.

The scheduled redemption date for both classes of shares issued is December 1, 2019 (the Termination Date). The Company’s board of directors may extend the Termination Date for further terms of five years each. 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 Pfd-3 (low) rating on the Preferred Shares is based primarily on the current downside protection available and the minimum downside protection provided by an asset coverage test, which does not permit any distribution to the holders of Class A Shares if the NAV of the Company falls below $15.00.

The main constraints on the rating are (1) the Company’s dependence on the value and dividend policies of the securities in the Portfolio and (2) the reliance on the Portfolio manager to generate additional income through methods, such as option writing.

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.