DBRS released its official rating of Pfd-2(low) for this issue today:
The Company will aim to provide the Class A Shareholders with regular monthly cash distributions in an amount targeted to be 6.00% per annum on the net asset value (NAV) of the Class A Shares. No distributions will be paid to the Class A Shares if the asset coverage available to the Preferred Shares drops below 1.65. Furthermore, no special distributions will be paid to the Class A Shares if the payment would drop the Company NAV to less than $25 per unit; however, special distributions may be made to mitigate any potential tax liabilities to the Company.
The Pfd-2 (low) rating of the Preferred Shares is based on the downside protection available to the Preferred Shareholders, the credit quality and consistency of the BNS Shares dividend distributions, the dividend coverage for the Preferred Shares and the asset coverage test.
The main constraints to the rating are the following:
(1) The downside protection available to holders of the Preferred Shares depends totally on the value of the BNS Shares.
(2) The concentration of the entire portfolio in the BNS Shares.
(3) Changes in price and dividend policies of Bank of Nova Scotia may result in significantly less downside protection being available to the Preferred Shareholders.
Now, I don’t want to get into an endless game of ‘outguess the rating agency’, but the Pfd-2(low) rating looks a little low to me, compared with the other constituents of the SplitShare index. Or, perhaps, some of the Pfd-2 issues are due for a one-notch downgrade …
| SBN.PR.A and some Competitors | |||
| Ticker | Rating | Asset Coverage |
Underlying |
| MUH.PR.A | Pfd-2 | 1.49:1 | Diversified |
| FFN.PR.A | Pfd-2 | 2.56:1 | 15 Financials |
| FBS.PR.B | Pfd-2 | 2.88:1 | Big 5 Banks |
| FTN.PR.A | Pfd-2 | 2.75:1 | 15 Financials |
| DFN.PR.A | Pfd-2 | 2.82:1 | 15 Blue Chips |
| LBS.PR.A | Pfd-2 | 2.45:1 | 4 Lifecos, 6 Banks |
| WFS.PR.A | Pfd-2 | 2.05:1 | 30 Financials |
| PIC.PR.A | Pfd-2 | 1.73:1 | Big 5 Banks |
| SBN.PR.A | Pfd-2(low) | 2.36:1 | BNS Shares |
| BNA.PR.A | Pfd-2(low) | 3.83:1 | BAM.A Shares |
| LFE.PR.A | Pfd-2(low) | 2.72:1 | 4 LifeCo’s |
| ALB.PR.A | Pfd-2(low) | 2.01:1 | Big 5 Banks |
| BNA.PR.C | Pfd-2(low) | 3.83:1 | BAM.A Shares |
Update: The Asset Coverage ratio in the chart has been corrected for ALB.PR.A – the ratio originally shown was incorrect. Thanks to cowboylutrell in the comments who pointed out this outbreak of boneheadism on my part.
The chart above quotes the asset coverage of ALB.PR.A as being 1.30:1. Are you sure it is that low? I believe it should actually be closer to 2.00:1.
[…] The shares are tracked by HIMIPref™ and are a constituent of the SplitShare Index. Asset coverage, which has been discussed before, is a pretty skimpy 1.5+:1 as of October 31, according to Mulvihill. DBRS hasn’t published a single word about the issue in over five years … they’re currently rated at Pfd-2, but according to me they’re Pfd-2(low) with a negative trend AT BEST and should probably be Pfd-3 or Pfd-3(high). […]
[…] SBN.PR.A is tracked by HIMIPref™. PrefBlog’s last comment was regarding the DBRS rating of Pfd-2(low). […]