PIC.PR.A: DBRS Downgrades to Pfd-5

DBRS has announced that it:

has today downgraded the rating of the Preferred Shares issued by Mulvihill Premium Canadian Bank (the Company) to Pfd-5 from Pfd-4 (high).

The Company is a split share corporation that initially raised gross proceeds of $100 million in 1996 by issuing Preferred Shares and Class A Shares. The Company invests in a portfolio of common shares (the Portfolio) issued by Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank.

The Preferred Shares and Class A Shares that are currently outstanding were issued in September 2003 and September 2004, and were scheduled to terminate on November 1, 2010. On August 20, 2010, the Company announced a proposal to extend the term of the Company for an additional seven years. On September 29, 2010, the Company announced that its shareholders had approved a reorganization to extend the term of the Company.

DBRS has completed its review of the Company’s reorganization. The rating of the Preferred Shares has been downgraded to Pfd-5, based on a number of factors:

– The income earned on the Portfolio, net of Company management fees and expenses, does not fully cover the distribution paid to the Preferred Shares. Furthermore, the Company intends to continue to pay quarterly cash distributions on the Class A Shares of $0.15 per share. As a result, there is an annual grind on the net asset value (NAV) of the Portfolio of more than 4%, absent share price appreciation (if any).

– The downside protection available to the Preferred Shares is approximately 27% (as of October 14, 2010). When adjusted to reflect the annual grind on the Portfolio, the downside protection is significantly lower than protection levels commensurate with preferred share ratings in the Pfd-4 rating category.

– There is not a NAV test that suspends distributions to the Class A Shares if the NAV drops below a specified value. Canadian split share companies generally include a NAV test if they pay regular distributions to the Class A Shares (or capital shares) greater than the excess income of the split share company.

The factors above existed prior to the reorganization of the Company; however, the extension of the term of the Company by seven years has increased the length of time for which holders of the Preferred Shares are exposed to grind on the NAV as well as common share price volatility.

PIC.PR.A was last mentioned on PrefBlog when the term extension was approved. There is a retraction right exercisable November 1, but I’m not sure what the notice period is and in any case it will vary according to dealer. However, those wishing to unload will note that the issue closed today at 14.94-99, 5×6, so if you missed it you haven’t missed much.

PIC.PR.A is tracked by HIMIPref™ but is relegate to the Scraps index on credit concerns.

One Response to “PIC.PR.A: DBRS Downgrades to Pfd-5”

  1. […] was last mentioned on PrefBlog when it was downgraded to Pfd-5 last Friday; at that time, downside protection was about 27%. They might want to bump that up a notch now that […]

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