DBRS Confirms Brompton Oil Split Preferred Shares at Pfd-3

DBRS Limited (DBRS) confirmed the Preferred Shares issued by Brompton Oil Split Corp. (the Company) at Pfd-3. The Company invests in common shares of at least 15 large capitalization North American oil and gas issuers (the Portfolio) selected from the S&P 500 Index and the S&P/TSX Composite Index. The Company may also invest up to 25% of the Portfolio value in the common shares of issuers listed on the S&P 500 Index or the S&P/TSX Composite Index that satisfy its investment criteria, operating in energy subsectors including equipment, services, pipelines, transportation and infrastructure. The Portfolio is approximately equally weighted, actively managed and rebalanced at least semi-annually. A portion of the Portfolio’s investments are denominated in U.S. dollars; however, substantially all of this exposure is hedged back to Canadian dollars. The Company has the ability to write covered call options or engage in securities lending in order to generate additional income.

Dividends received on the Portfolio are used to pay a fixed cumulative quarterly distribution to holders of the Preferred Shares of $0.1250 per Preferred Share ($0.50 per annum or 5.0% per annum on the initial issue price of $10.00 per Preferred Share). Holders of the Capital Shares (the Class A Shares) receive a regular monthly non-cumulative cash distribution of $0.10 per Class A Share ($1.20 per annum), subject to the asset coverage test, which does not permit any distributions to holders of the Class A Shares if the net asset value (NAV) of the Company falls below $15.00. Although distributions to the Class A Shares were resumed in January 2018, they were suspended several times in 2017 due to a decline in the Portfolio NAV and the asset coverage test not being met. The reduction in NAV was a result of losses from the oil and gas securities in the Portfolio due to the market weakening in 2017.

As at January 16, 2018, the downside protection available to holders of the Preferred Shares was 38%. The dividend coverage ratio was approximately 0.2 times. The confirmation of the rating of the Preferred Shares at Pfd-3 is based primarily on the current levels of downside protection and the minimum downside protection provided by the asset coverage test.

Both classes of shares are scheduled to mature on March 31, 2020. The board of directors may extend the term of the Company and the shares by successive terms of up to five years, provided that shareholders are given an optional retraction right at the end of each successive term.

The main constraints to the rating are the following:

(1) The downside protection available to holders of the Preferred Shares depends on the value of the common shares held in the Portfolio.

(2) Volatility of price and changes in the dividend policies of the underlying issuers may result in significant reductions in interest coverage or downside protection from time to time.

(3) Reliance on the manager to generate a high yield on the Portfolio to meet distributions and other Company expenses without having to liquidate portfolio securities.

(4) The concentration of the Portfolio in one industry.

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 by clicking on the link under Related Documents 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 for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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