YLD.PR.A is the 5.5% Class I Cumulative Preferred Shares; YLD.PR.B is the 7.0% Class II Cumulative Preferred Shares.
DBRS has announced:
DBRS has today downgraded the 5.5% Class I Cumulative Preferred Shares (the Class I Shares) issued by Split Yield Corporation (the Company) from Pfd-2 (low) to Pfd-3 with a Negative trend. Also, DBRS has confirmed the rating of the 7.0% Class II Cumulative Preferred Shares (the Class II Shares) at D.
…
Quadravest Capital Management (the Manager) manages the Portfolio, generating income from dividends, covered call option premiums and capital appreciation. The holders of the Class I Shares and the Class II Shares receive fixed, cumulative quarterly dividends yielding 5.50% and 7.00% per annum, respectively. The Class I Shares rank in priority to the Class II Shares with respect to the payment of dividends and repayment of capital on the Termination Date. Excess income, if any, is distributed on a quarterly basis to the Capital Shareholders.Since inception, the net asset value (NAV) of the Portfolio has declined from $47.57 to $28.40 per share (as of December 31, 2007), a decline of about 40%. The current NAV provides downside protection of about 29.6% to the Class I Shares. If the portfolio was liquidated and proceeds distributed, the Class II Shareholders would experience a loss of about 44% of their initial principal. The Portfolio would have to generate a return of about 9% in the next year in order for the NAV to maintain its current level.
The downgrade of the Class I Shares is based on the current NAV of the Portfolio, as well as the annual grind on the Portfolio relative to its current NAV.
The rating history of these issues is:
| YLD.PR.A – Class I prefs | ||
| From | To | DBRS Rating |
| 1998-04-16 | 2001-10-22 | Pfd-1 |
| 2001-10-23 | 2002-07-10 | Pfd-2 |
| 2002-07-11 | 2008-01-04 | Pfd-2(low) |
| 2008-01-07 | Indefinite | Pfd-3 (trend negative) |
| YLD.PR.B – Class II prefs | ||
| From | To | DBRS Rating |
| 1998-04-16 | 2001-10-22 | Pfd-3 |
| 2001-10-23 | 2003-01-27 | Pfd-4 |
| 2003-01-28 | Indefinite | D |
Both issues are tracked by HIMIPref™ but neither is included in the SplitShare index – YLD.PR.A because of volume concerns, YLD.PR.B due to credit concerns.
so the question is:
In view of a consistent track record of managing assets that over the years are constantly degrading in quality, why the hell would anyone purchase any of Quadravest’s funds?
see my comment on the item posted above in James’ blog. the prospectus makes these look great and the rating agencies give the prefs high (initial) ratings that I don’t think are warranted.
DBRS is tightening up its requirements for split-share ratings. It used to be that you could get a Pfd-2 rating for an asset coverage of 1.4:1 (e.g., a $25 unit comprised of a $15 pref and $10 capital share), but now they’re looking for 2.2:1 – (e.g., a $25 unit with a $10 pref and a $15 capital share … approximately).
Don’t forget that the investment business – particularly, but not exclusively, as it applies to retail – is not about returns. Nobody except you two troublemakers really gives a rat’s ass about returns.
Leaving the rats behind(s) behind …
I hope DBRS isn’t treating all split shares the same in terms of asset coverage. They need to be thinking about standard deviation (which is larger for a single asset — think BAM.PR.ABC and underlying BAM; larger for volatile economic segments — think oil and gas trusts under ES.PR; larger for concentrated segments — think banks; smaller for diversified groupings — financials; and smallest for the market as a whole — S&P-500 and, to a lesser extent TSX.) A larger standard deviation of the underlying should result in a lower credit rating for a split share with a given asset coverage.
If it doesn’t, then DBRS doesn’t give a rat’s ass about investors, which I’m coming to the view may apply to the whole fee-sucking financial industry….
Your hope is well-founded.
If you go to the DBRS website and click the “Methodologies” button (at the top of the screen) and scroll way, way down to the “Split Shares and Funds” category, you’ll see a publication titled “Split Share Issuers: A Performance Overview”. Asset coverage is just one of the things they look at, and the nature of the assets is examined.
You will recall that, despite asset coverage in the neighborhood of 3.7:1, the BNA issues have ratings of Pfd-2(low) – the same as those backed directly by BAM. The ratings of single-issuer split shares is constrained by the rating of preferreds issued directly by the underlying issuer, which only makes sense.
There has been high volatility in the past ten years of ratings of split share issues. DBRS has responded by increasing the ‘base case asset coverage’ required for a Pfd-2 rating to about 2.2:1 from the old level of about 1.4:1.
Which is not to say they’re perfect! You may recall my complaints regarding their rating of HPF.PR.B. Additionally, I suspect that they are “grandfathering” some ratings … for instance, given the nature of the portfolio and the short time to maturity, I have no qualms about PIC.PR.A – but with coverage of under 1.6:1 and a highly correlated portfolio, I do not believe they would be rated Pfd-2 as a new issue.
So … read their advice! Listen to their advice! But … check their advice and don’t be scared of saying … ‘Um … I’d rather not’.