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 (rated A (high) with a Stable trend by DBRS), Bank of Montreal (rated AA with a Stable trend by DBRS), 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), CI Financial Corp. (rated BBB (high) with a Negative trend by DBRS), Citigroup Inc. (rated “A” with a Positive trend by DBRS), The Goldman Sachs Group Inc. (rated A (high) with a Stable trend by DBRS), Great-West Lifeco Inc. (rated A (high) with a Stable trend by DBRS), JPMorgan Chase & Co. (rated AA (low) 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 Stable trend by DBRS), Royal Bank of Canada (rated AA with a Positive trend by DBRS), Sun Life Financial Inc. (rated “A” with a Stable trend by DBRS), The Toronto-Dominion Bank (rated AA with a Positive trend by DBRS) and Wells Fargo & Company (rated AA (low) with a Stable trend by DBRS). 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, 2018. No more than 10% of the NAV of the Company may be invested in any single issuer. Each issuer currently represents between 0.7% and 8.1% of the total NAV of the Company. 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, 2018, approximately 40% of the Portfolio was invested in USD-denominated assets.

The holders of the Preferred Shares are entitled to 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 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 0.5 times. Regular monthly Class A Shares distributions will result in an average annual grind of approximately 6.7% over the remaining two years in the term. Downside protection available to holders of the Preferred Shares was 37.5% as of November 15, 2018.

The Company completed one overnight offering this year on May 31, 2018, and issued equal amounts of Preferred Shares and the Class A Shares raising $104.2 million in gross proceeds.

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 Shares dividend increase and other metrics of the Portfolio 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 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.