PrefBlog

Dominion Bond Rating Service has announced that it:

has today assigned a stability rating of STA-3 (high) to the retractable units (the Units) issued by Diversified Preferred Share Trust (the Trust). The previous rating of Pfd-2 (low) has been discontinued as the DBRS preferred share rating scale will no longer be applied to the Trust.

Proceeds from the Trust’s offerings have been used to invest in a diversified portfolio (the Portfolio) of preferred shares and securities. The Portfolio is passively managed by Sentry Select Capital Inc. (the Administrator).

On May 11, 2010, DBRS published a methodology for rating structured income funds. Prior to the release of the methodology, DBRS had applied its stability ratings only to income trusts, but with the release of the methodology, the stability rating scale now also applies to Canadian investment income funds. A stability rating provides an opinion on both the stability and sustainability of a fund’s cash distributions per unit.

A stability rating of STA-3 (high) has been assigned to the Units issued by the Trust. This rating is mainly based on the strong credit quality of the Trust’s preferred share portfolio and the limited flexibility for the Administrator to invest in riskier assets. The main constraint to the rating is the current shortfall in portfolio income relative to the distribution paid out to the Trust’s unitholders. The Trust’s net income can currently cover approximately 83% of the distributions paid out to unitholders. Other constraints to the rating include the interest rate risk of the Portfolio and the capital losses that may result from underlying securities being called for redemption by their respective issuers.

DBRS believes that a stability rating reflecting an opinion on the stability of the fund’s distributions will be useful to the Trust’s investors. The rating is based on factors such as the asset composition, credit quality and diversification of the Trust’s portfolio, among others. For more information on the rating factors considered by DBRS in its analysis, refer to the Structured Income Fund methodology that was published on May 11, 2010.

The statement The Trust’s net income can currently cover approximately 83% of the distributions paid out to unitholders is, I think, a little misleading: a large proportion of the fund’s holdings are FixedResets, which may well be called in the short term; a chunk of the fund’s dividend income is, in fact, return of capital.

However, it must be remembered that in the fall of 2006, I predicted disaster for preferred share closed end fund distributions on the basis that all of them PerpetualPremium thingies were in danger of being called in the short term. Guess what happened next!

Additionally, I will quibble about the unqualified use of the word “passive” given the variation in the degree of leverage indulged in by the fund:

As at December 31, 2009, the Facility drawn down using bankers’ acceptances and prime rate loans was $Nil (2008 – $Nil) and $13,850,000 (2008 – $11,000,000), respectively. The interest and other charges on the Facility for the year was $407,608 (2008 – $810,482). During 2009, the minimum and maximum Facility balance was $6,000,000 (2008 – $11,000,000) and $13,850,000 (2008 – $25,000,000), respectively. As of December 31, 2009, the Fund is in compliance with the Facility’s covenants.

I am pleased to see that the fund is now publishing monthly performance numbers although it is not immediately clear whether the performance is based on market price or NAV.

This entry was posted on Thursday, August 26th, 2010 at 10:04 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.