DBRS Confirms Brompton Split Banc Corp. Preferred Shares Rating of Pfd-3 (high)

DBRS Limited (DBRS) confirmed the rating of the Preferred Shares issued by Brompton Split Banc Corp. (the Company) at Pfd-3 (high). The Company invests in a portfolio of common shares (the Portfolio) issued by the six major banks in Canada: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and The Toronto-Dominion Bank. The Portfolio is approximately equally weighted and is subject to annual rebalancing. The termination date of the Company is November 29, 2022. 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. On maturity, the holders of the Preferred Shares will be entitled to the value of the Company up to the face value 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.

Pursuant to the coupon increase on the Preferred Shares beginning December 1, 2017, distributions on the Preferred Shares are made on a quarterly basis in the amount of $0.125, yielding 5.0% annually on the original $10.00 issue price. Distributions on the Class A Shares are made on a monthly basis in the amount of $0.10 per share. No monthly distributions to the Class A Shares will be made if distributions to 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. Furthermore, no special distributions will be made if the NAV of the Company is below $25.00. The Company has the ability to write covered call options or covered put options with respect to all or part of the common shares of the Portfolio, which it currently actively engages into to generate additional income. In addition, the Company may enter into Securities Lending Agreements in order to generate an alternative source of income.

Following the special retraction on November 29, 2017, 549,387 additional Preferred Shares were issued during the private placement completed on December 1, 2017, in order to maintain an equal number of both classes of shares. There are currently 7,837,901 of each class of shares outstanding.

As at April 5, 2018, the downside protection available to the Preferred Shares was approximately 56.9%. Given the recent fluctuations in the equity markets, it has remained volatile throughout the past year. The dividend coverage was 1.4x. The confirmation of the rating of the Preferred Shares at Pfd-3 (high) is based primarily on the downside protection available, the dividend coverage and the minimum downside protection provided by the asset coverage test.

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 investment portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

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

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 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.