ALB.PR.C Firm on Light Volume

Scotia Managed Companies announced on February 26:

that it has completed its public offering of Class B preferred shares, series 2 (“Preferred Shares”) raising $17,649,845 through the issuance of 687,567 Preferred Shares at a price per share of $25.67. In addition, the Company has redeemed all of its outstanding Class B preferred shares, series 1. The Preferred Shares were offered to the public on a best efforts basis by a syndicate of agents led by Scotia Capital Inc., which included National Bank Financial Inc., CIBC World Markets Inc., and BMO Nesbitt Burns Inc.

Allbanc Split Corp. II is a mutual fund corporation created to hold a portfolio of publicly listed common shares of selected Canadian chartered banks. Capital Shares and Preferred Shares of Allbanc Split Corp. II are listed for trading on The Toronto Stock Exchange under the symbols ALB and ALB.PR.C, respectively.

The shares have been rated Pfd-2(low) by DBRS:

The Company holds a portfolio (the Portfolio) of publicly listed common shares of Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank (collectively, the Portfolio Shares) in order to generate dividend income for the holders of the Series 2 Preferred Shares and to enable holders of the Class A Capital Shares to participate in any capital appreciation in the Portfolio Shares.

The dividends received from the Portfolio will be used to pay a fixed cumulative quarterly distribution of $0.3048 per share to holders of the Series 2 Preferred Shares, yielding approximately 4.75% annually on the initial issue price. The current yield on the Portfolio shares fully covers the Series 2 Preferred Share dividends, providing dividend coverage of approximately 1.7 times. The Class A Capital Shares are expected to receive all excess dividend income after the Series 2 Preferred Share distributions and other expenses of the Company have been paid.

The Pfd-2 (low) rating of the Series 2 Preferred Shares is based primarily on the downside protection and dividend coverage available, as well as on the strong credit quality and consistency of dividend distributions of the Portfolio holdings.

Some highlights from the prospectus dated 2016-2-17:

Holders of Series 2 Preferred Shares will be entitled to receive quarterly fixed cumulative preferential distributions equal to $0.3048 per Series 2 Preferred Share. On an annualized basis, this would represent a yield on the offering price of the Series 2 Preferred Shares of approximately 4.75%. Such distributions are expected to consist of ordinary dividends but may include non-taxable returns of capital and capital gains dividends. Such quarterly distributions are expected to be paid by the Company on or before the last day of May, August, November and February in each year. Based on the expected closing date of February 26, 2016, the initial distribution will be approximately $0.3048 per Series 2 Preferred Share and is expected to be payable on or before May 31, 2016.

The Series 2 Preferred Shares may be surrendered for retraction at any time and will be redeemed by the Company on February 28, 2021 (the “Redemption Date”). In addition, the Series 2 Preferred Shares may otherwise be redeemed by the Company prior to the Redemption Date in certain limited circumstances including on February 28th in each year or, where such day is not a business day, on the preceding business day, if there are any unmatched retractions of Capital Shares.

The issue will be tracked by HIMIPref™ and is assigned to the SplitShares index – although, given the small size of the issue, I expect it to move to Scraps on volume concerns eventually.

The issue traded 10,000 shares in a range of 25.67-97 on its debut.

Maturity Type : Call
Maturity Date : 2017-02-28
Maturity Price : 25.67
Evaluated at bid price : 25.68
Bid-YTW : 4.67 %

Update, 2016-3-5: Confirmed at Pfd-2 by DBRS.

The five banks continued with the regular increases in the dividend distribution policies in 2015, which had brought the dividend coverage ratio to 2.39 times as of February 25, 2016. Holders of the Capital Shares do not receive a stated regular distribution. They are, however, expected to receive all excess dividend income after the Class C Preferred Share distributions and other expenses of the Company have been paid.

In the past twelve months, decreasing share prices of the five banks had a reflection on the net asset value of the Company, bringing overall the downside protection to 58.7% as of February 25, 2016, down from 62.6% a year ago. Nevertheless, the downside protection has demonstrated relative stability over the past year. Given a strong dividend coverage ratio, credit quality of the underlying shares and the downside protection level, DBRS confirms the rating of the Class C Preferred Shares at Pfd-2.

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