PrefBlog

DBRS has announced that it:

has today downgraded the Preferred Shares issued by Copernican International Financial Split Corp. (the Company) to Pfd-5 (low), with a Negative trend, from Pfd-4 (low). The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In March and April of 2007, the Company raised gross proceeds of $158.4 million by issuing 7.92 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $10 each). The initial split share structure provided downside protection of 50% to the Preferred Shares as all issuance costs were paid by AIC Investment Services Inc. (the Manager).

The net proceeds from the offering were used to invest in a portfolio of common shares (the Portfolio) issued by international financial institutions (IFS) with strong credit quality. The Portfolio is actively managed by the Manager to invest in IFS that have at least a US$1 billion market capitalization and exhibit the potential for attractive dividend yields and strong earnings growth momentum. It is expected that a minimum of 80% of all foreign content will be hedged back to Canadian dollars at all times to mitigate net asset value (NAV) volatility relating to foreign currency exchange fluctuation. The Manager also employs an option-writing strategy (covered calls and cash-covered puts) to generate additional income.

Holders of the Preferred Shares receive fixed cumulative quarterly dividends yielding 5.0% per annum. The Company aims to provide holders of the Class A Shares with monthly distributions targeted at 8.0% per annum. There is an asset coverage test in place that does not permit the Company to make monthly distributions to the Class A Shares if the dividends on the Preferred Shares are in arrears or if the NAV of the Portfolio is less than $16.50 after giving effect to such distributions. As a result, distributions to the Class A Shares have been suspended since January 2008.

The NAV of the Portfolio has declined significantly since inception. On July 2, 2008, DBRS downgraded the Preferred Shares to Pfd-4 (low) when the downside protection available to the Preferred Shares was 11%. Since then, the NAV has declined from $11.20 to $7.24 (a 35% decrease). As of October 31, 2008, holders of the Preferred Shares would have experienced a loss of approximately 28% of their initial issuance price if the Portfolio holdings had been liquidated and proceeds distributed. The Portfolio requires an annualized return of more than 15% for the remaining term of the Company (about five years) in order to pay all cumulative dividends and full principal with respect to the Preferred Shares on the final maturity date. These returns will need to be generated from dividend income, option writing or capital appreciation in the Portfolio’s holdings.

There is now a significant chance that holders of the Preferred Shares will experience losses. DBRS will not lower its rating to D until it becomes clear that losses are unavoidable. Since there are still five years remaining until final maturity, the Manager has sufficient time to generate the returns necessary for holders of the Preferred Shares to avoid experiencing first-dollar loss.

The redemption date for both classes of shares issued is December 2, 2013.

CIR.PR.A was reviewed as part of the DBRS Mass Review of Splits.

CIR.PR.A is not tracked by HIMIPref™.

This entry was posted on Thursday, November 6th, 2008 at 6:50 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.