PrefBlog

DBRS has announced:

has today downgraded the 5.5% Class I Cumulative Preferred Shares (the Class I Shares) issued by Split Yield Corporation (the Company) to Pfd-5, with a Negative trend, from Pfd-3. The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008. Also, DBRS has confirmed the rating of the 7.0% Class II Cumulative Preferred Shares (the Class II Shares) at D.

In April 1998, the Company issued $30.6 million of Class I Shares at $20 each, $23 million of Class II Shares at $15 each and $23 million of Capital Shares at $15 each. The net proceeds of the offering are invested in a portfolio (the Portfolio) of common shares of companies listed on one of two selected North American equity indices. The Portfolio provided initial downside protection of about 58% to the Class I Shares and 26% to the Class II Shares (after expenses). In December 2004, the final maturity date for all classes of shares was extended from February 1, 2006, to February 1, 2012 (the Termination Date), as a result of a resolution approved at a special shareholders’ meeting.

Quadravest Capital Management (the Manager) manages the Portfolio, generating income from dividends, covered-call option premiums and capital appreciation. The holders of the Class I Shares and the Class II Shares receive fixed, cumulative quarterly dividends yielding 5.50% and 7.00% per annum, respectively. The Class I Shares rank in priority to the Class II Shares with respect to the payment of dividends and repayment of capital on the Termination Date. On July 18, 2008, the Company announced that it would suspend its dividend payment for the Class II Shares for the quarter in order to preserve cash and to assist in rebuilding the net asset value (NAV) in an attempt to meet its long-term repayment objectives. The Class II Shares dividend was again suspended for the October 2008 payment. The suspension of the Class II Shares dividend benefits the Class I Shares by significantly reducing the hurdle rate required for the Manager to maintain a stable NAV.

The NAV of the Portfolio has declined significantly since inception. On January 7, 2008, DBRS downgraded the Class I Shares to Pfd-3 when the downside protection available was about 30%. Since then, the NAV has declined from $28.40 to $20.59 (a 27% decrease). As of October 31, 2008, the downside protection available to the Class I Shares is only 3%. The downgrade of the Class I Shares is primarily based on the reduced asset coverage available for the repayment of principal on the Termination Date.

Assuming the continued suspension of the Class II Shares distributions, the Portfolio still requires an annualized return of more than 7% from dividend income, option writing and/or capital appreciation in order to maintain a stable NAV. Given the high hurdle rate and the grind to the portfolio, DBRS has assigned a Negative trend to the rating of the Class I Shares.

This issue was part of the DBRS Mass Review of Split Corporations.

YLD.PR.A is tracked by HIMIPref™. It is included in the “Scraps” sub-index rather than “SplitShares” due to both volume and credit concerns.

This entry was posted on Thursday, November 6th, 2008 at 6:39 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.