DBRS has announced that it:
has upgraded its credit rating on the Preferred Shares issued by Financial 15 Split Corp. (the Company) to Pfd-3 from Pfd-4 (high). The rating upgrade takes into consideration the increase in downside protection to 52.0% as of January 15, 2025, from 42.4% as of January 31, 2024, the decrease in the Preferred Shares’ distribution rate to 8.5% annually on the Preferred Share’s redemption value of $10 for the fiscal year beginning December 1, 2024, from 9.25% annually for the fiscal year beginning December 1, 2023, the dividend coverage ratio of 0.4 times (x), a projected grind of 9.6% per year over the remaining term and unhedged foreign currency exposure.
The Company invests in a portfolio (the Portfolio) consisting primarily of common shares of 15 financial services companies made up of Canadian and U.S. issuers as follows: Bank of America Corporation; Bank of Montreal; The Bank of Nova Scotia; Canadian Imperial Bank of Commerce; CI Financial Corp.; Citigroup Inc.; The Goldman Sachs Group, Inc.; Great-West Lifeco Inc.; JPMorgan Chase & Co.; Manulife Financial Corporation; National Bank of Canada; Royal Bank of Canada; Sun Life Financial Inc.; The Toronto-Dominion Bank; and Wells Fargo & Company. The Company may invest up to 15% of the Net Asset Value (NAV) in securities of issuers other than the core 15 and no more than 10% of the NAV may be invested in any single issuer. As of May 31, 2024, 1.1% of the Portfolio was also invested in Fifth Third Bancorp and AGF Management, and 13.6% was held in cash. Quadravest Capital Management Inc. is acting as the manager (the Manager) for this Company.
A portion of the Company’s Portfolio is exposed to currency risk because it includes securities denominated in U.S. dollars (USD), while the NAV of the Company is expressed in Canadian dollars. The Company has not entered into currency-hedging contracts for the USD portion of the Portfolio, although the Company may use derivatives for hedging purposes. As of May 31, 2024, 44.9% of the Portfolio was invested in USD-denominated assets.
The Company has an at-the-market equity program (the ATM Program) that allows the Company to issue Preferred Shares and Class A Shares to the public from time to time at the Company’s discretion, effective until January 20, 2026, unless terminated prior to such date by the Company. The maximum gross proceeds from the issuance of the shares will be $400 million. During the six-month period ended May 31, 2024, 6,772,600 Preferred Shares were sold through the ATM Program at an average selling price of $10.16 per Preferred Share, raising gross proceeds worth $68.8 million. During the same period, 7,173,300 Class A Shares were sold through the ATM Program at an average selling price of $7.77 per Class A Share, raising gross proceeds worth $55.8 million.
The Company’s termination date is December 1, 2025. At maturity, the holders of the Preferred Shares will be entitled to the value of the Company, up to the face amount of the Preferred Shares, in priority to the holders of the Class A Shares. Holders of the Class A Shares will receive the remaining value of the Company. The termination date can be extended for additional terms of five years at the Company’s discretion, but shareholders are provided with a special retraction right in connection with such extension.
The Preferred Shares dividend rate is set by the board of directors annually and subject to a minimum of 5.5% until 2025. The Preferred Share dividend rate for the fiscal year commencing December 1, 2024 was set at 8.5%, 75 basis points below the dividend rate set for the prior fiscal year. Holders of the Class A Shares are currently receiving monthly distributions of $0.1257 per share, equivalent to 10.1% per annum on the issue price of $15. No distributions will be paid to the Class A Shares if the NAV per unit (Unit, consisting of one Preferred Share and one Class A Share) falls below $15. The NAV per Unit remained above $15 during 2024, and distributions to the Class A Shares were regularly paid out.
As of January 15, 2025, the asset coverage ratio is at 2.1x. The downside protection available to holders of the Preferred Shares has increased to 52.0% from 42.4% a year ago. The dividend coverage ratio remains at 0.4x, indicating that the current dividend income is not enough to fully cover the cumulative preferential monthly cash dividends on the Preferred Shares. Without giving consideration to capital appreciation potential or any source of income other than the dividends earned by the Portfolio, the current Preferred Share dividends together with the distributions on the Class A Shares will create a projected grind on the NAV of the Portfolio of approximately 9.6% per year for the remaining term of the Preferred Shares. To supplement the Portfolio income, the Company may engage in covered call options or cash covered put options on all or a portion of the shares held in the Portfolio.
The main constraints to the rating are the following:
(1) Volatility in stock prices along with changes in the dividend policies of the underlying issuers may result in significant reductions in the Preferred Shares’ dividend coverage or downside protection from time to time.
(2) A Preferred Shares’ dividend coverage that is less than one time.
(3) Reliance on the manager to generate a high yield, through methods such as option writing, on the investment portfolio to meet distributions and other expenses without having to liquidate portfolio securities.
(4) The monthly cash distributions to holders of the Class A Shares which create grind on the Portfolio. This risk is mitigated by a NAV test.
(5) The concentration of the Portfolio in one industry.
(6) The unhedged portion of the USD-denominated Portfolio that exposes the Portfolio to foreign currency risk.
Morningstar DBRS’ credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions’ respective press releases at issuance.
The affected issue is FTN.PR.A.
FFN.PR.A Upgraded to Pfd-3(low) by DBRS
Wednesday, February 5th, 2025DBRS has announced that it:
The affected issue is FFN.PR.A.
Posted in Issue Comments | No Comments »