PrefBlog

DBRS has announced that it:

today downgraded the Preferred Shares issued by BMONT Split Corp. (the Company) to Pfd-4, with a Stable trend, from Pfd-2 (low). The rating has been removed from Under Review with Negative Implications, where it was placed on December 19, 2008.

In August 2004, the Company raised gross proceeds of approximately $88 million by issuing 1.525 million Preferred Shares at $27.45 each and 3.05 million Capital Shares at $15.27 each, with a redemption date of August 5, 2009 (the Redemption Date) for both classes of shares. The net proceeds from the offering were invested in a portfolio of common shares (the BMO Shares) of Bank of Montreal (BMO). The initial split share structure provided downside protection of approximately 50% to the Preferred Shares.

The holders of the Preferred Shares receive fixed cumulative quarterly distributions yielding 4.5% per annum. The current dividend income from the BMO Shares provides dividend coverage of approximately 1.8 times. In the past, excess dividends net of all expenses of the Company have been paid as dividends to holders of the Capital Shares. On January 8, 2009, the Board of Directors of the Company announced that excess dividends would be invested in short-term debt securities or BMO Shares until the scheduled redemption of the Company’s shares on the Redemption Date.

The NAV of the BMO Shares has declined significantly, dropping from $54.89 per share to $30.77 in the last year, a decline of 44%. The current downside protection available to the Preferred Shareholders is approximately 11% (as of February 13, 2009). The downgrade of the Preferred Shares is primarily based on the lower level of asset coverage available to cover the Preferred Shares principal.

There are less than six months until the Redemption Date, which has limited the severity of the downgrade to the Preferred Shares. If the Redemption Date was to be extended past August 5, 2009, then negative rating action would likely be required.

BMT.PR.A is tracked by HIMIPref™. It was last mentioned on PrefBlog when the DBRS Mass Downgrade of Feb 13 left the issue under review and unresolved. It is included in the “Scraps” subIndex due to volume concerns – now there are two reasons!

This entry was posted on Wednesday, February 18th, 2009 at 8:05 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.