DBRS Confirms Canadian Banc Corp. Preferred Shares Rating at Pfd-3 (high)

DBRS Limited (DBRS) confirmed the rating of the Preferred Shares issued by Canadian Banc Corp. (the Company) at Pfd-3 (high). The Company invests in a portfolio of common shares (the Portfolio) issued by the six largest Canadian banks: Bank of Montreal (rated AA with a Stable trend by DBRS), The Bank of Nova Scotia (rated AA with a Stable trend by DBRS), Canadian Imperial Bank of Commerce (rated AA with a Stable trend by DBRS), National Bank of Canada (rated AA (low) with a Stable trend by DBRS), Royal Bank of Canada (rated AA with a Positive trend by DBRS) and The Toronto-Dominion Bank (rated AA with a Positive trend by DBRS). Each of the six banks generally represents no less than 5% and no more than 20% of the net asset value (the NAV) of the Portfolio. In addition, up to 20% of the NAV of the Portfolio may be invested in equity securities of Canadian or foreign financial services corporations other than the banks listed above.

The termination date of the Preferred Shares is December 1, 2018. The term of the Company may be extended beyond the termination date for additional terms of five years each as determined by the Company’s board of directors.

On May 23, 2018, the Company completed an overnight offering, issuing 2,915,000 Preferred Shares and 2,915,000 Class A Shares for total gross proceeds of $68.1 million.

Dividends received from the Portfolio are used to pay to holders of the Preferred Shares floating cumulative monthly dividends at a rate per annum equal to the prevailing prime rate in Canada plus 0.75%, with a minimum annual rate of 5% and a maximum annual rate of 7%. Holders of Class A Shares are entitled to receive monthly cash distributions targeted to be 10% annually based on the volume-weighted average market price of the Class A Shares for the last three trading days of the preceding month. On maturity, the holders of the Preferred Shares will be entitled to the value of the Portfolio, up to the face value of the Preferred Shares, in priority to the holders of the Class A Shares. The Class A Shareholders will receive the remaining value of the Company.

The monthly cash distributions to the holders of the Class A Shares will result in an average grind on the NAV of the Portfolio of approximately 1.47% until the end of the term. An asset coverage test in place mitigates the effects of the grind by not permitting the Company to make monthly distributions to the Class A Shares if the dividends of the Preferred Shares are in arrears or if the NAV of the Portfolio falls below 1.5 times the principal amount of the outstanding Preferred Shares. In addition, no special distributions can be made to the Class A Shares if, after such distributions, the NAV is below $25. This ensures a sufficient level of protection to the holders of the Preferred Shares.

The main form of credit enhancement available to the Preferred Shares is a buffer of downside protection. The amount of downside protection available to the Preferred Shares as of July 31, 2018, was 55.7%. The Preferred Share dividend coverage ratio was approximately 0.9 times. The amount of downside protection and dividend coverage overall remained stable over the past year.

Although the credit quality of the underlying assets of the Portfolio is strong, the Portfolio is concentrated in the financial services industry. The floating nature of dividend distributions to the Preferred Shares and Class A Shares, while mitigated by predetermined ranges of dividend yields, may potentially increase the volatility of the protection available to holders of the Preferred Shares in a high interest rate environment. Based on these considerations and Portfolio performance metrics, DBRS confirms the Pfd-3 (high) rating of the Company’s Preferred Shares.

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 principal methodology is Rating Canadian Split Share Companies and Trusts, which can be found on dbrs.com under Methodologies.

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 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.