DBRS No Longer Assigning Trends to SplitShares

DBRS has announced that it:

today removed all trends on the ratings of 53 preferred shares and securities issued by 48 split share companies and trusts (the Issuers). DBRS will no longer assign trends to preferred shares (the Preferred Shares) issued by split share corporations.

Each of the Issuers has invested in a portfolio of securities (the Portfolio) funded by issuing two classes of shares – preferred shares and capital shares. The main form of credit enhancement available to Preferred Shares is a buffer of downside protection. Downside protection corresponds to the percentage decline in market value of the Portfolio that must be experienced before the Preferred Shares would be in a loss position. The amount of downside protection available to Preferred Shares fluctuates over time based on changes in the market value of the Portfolio.

Split share ratings are unique in that the level of credit enhancement available is dependent largely on the market value of the split share company’s portfolio. As a result, the outlook for a particular rating can change significantly over very short time periods, as was demonstrated during the equity markets decline of Q4 2008/Q1 2009, and the subsequent rebound. Therefore, a longer-term trend is not a fitting indicator for a Preferred Share rating because the level of stability associated with the rating is dependent on the volatility and trend of equity markets. As a result, DBRS has removed its trends for existing Preferred Share ratings and will no longer use rating trends when assigning Preferred Share ratings.

DBRS will continue to place Preferred Share ratings Under Review with Positive, Negative or Developing Implications when appropriate to indicate the potential for a rating change based on changes in the market value of a split share issuer’s portfolio.

This continues their revision of SplitShare rating methodology.

A “trend” would have value if it was clearly understood that it referred to drag on NAV (e.g., when fixed charges exceed portfolio income), but otherwise we’re just as well off without it.

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