DBRS Confirms Rating of Brompton Split Banc Corp. Preferred Shares Rating at 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, plus one exchange-traded fund (ETF), Brompton North American Financials Dividend ETF. The inclusion of additional holdings is permitted after the updates to investment objectives and strategies took place on July 16, 2018, according to which up to 10% of the Portfolio may be invested, from time to time, in global financial companies. The Portfolio portion allocated to the major banks remains approximately equally weighted.

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.

On March 1, 2019, the Company completed a treasury offering issuing Preferred Shares and Class A Shares for gross proceeds of approximately $20.5 million.

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.

As at April 4, 2019, the downside protection available to the Preferred Shares was approximately 55.4%. The dividend coverage was 1.6x. The confirmation of the rating of the Preferred Shares at Pfd-3 (high) is based on the downside protection available, the strong 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.

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 & Criteria.

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.

DBRS Limited
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Toronto, ON M5H 3M7 Canada