SplitShares : Massive DBRS Review of Financial Splits

DBRS has announced that it:

has today placed the rating of certain structured preferred shares (Split Shares) with significant exposure to the financials sector Under Review with Developing Implications. Each of these split share companies has invested in a portfolio of securities with a focused exposure to financial institutions. The market concerns regarding the current credit quality of domestic and international banks has resulted in ongoing volatility in the share price of many financial institutions. As a result of this volatility, the downside protection available to these Split Shares has come under increasing pressure.

Affected issues are:

Review-Developing by DBRS
Issue Current
Rating
Website Asset
Coverage
HIMIPref™?
Index
FBS.PR.B Pfd-2  Click  1.6:1
3/13
 Yes
SplitShare
ASC.PR.A Pfd-2(high)  Click  1.7:1
3/14
 Yes
Scraps
ALB.PR.A Pfd-2(low)  Click  1.6:1
3/13
 Yes
SplitShare
BMT.PR.A Pfd-2(low)  Click  1.5:1
3/13
 Yes
Scraps
CIR.PR.A Pfd-2(low)  Click  1.3:1
3/14
 No
CBW.PR.A Pfd-2(low)  Click  1.2:1
3/14
 No
FFN.PR.A Pfd-2  Click  1.8:1
3/14
 Yes
SplitShare
GBA.PR.A Pfd-3(high)  Click  1.1:1
3/18
 No
PIC.PR.A Pfd-2  Click  1.4:1
3/19
 Yes
SplitShare
NBF.PR.A Pfd-2(low)  Click  1.3:1
3/13
 No
RBS.PR.A Pfd-2(low)  Click  1.6:1
3/13
 No
TXT.PR.A Pfd-2(low)  Click  1.5:1
3/13
 No
FTU.PR.A Pfd-2  Click  1.4:1
3/14
 Yes
SplitShare
WFS.PR.A Pfd-2  Click  1.7:1
3/13
 Yes
SplitShare

I’ll try to add some colour to the table later … websites and asset coverage ratios, for instance. 

Update: Colour Added! The SplitShare index for 3/19 has been uploaded.

22 Responses to “SplitShares : Massive DBRS Review of Financial Splits”

  1. realboomer says:

    If I correctly understand DBRS’s rating methodology, a split should have asset coverage of 1.4 to 1.5 to be rated as Pfd 2. Based on the asset coverages shown in your table, it appears that a few of the issues that are currently rated as Pfd-2 may be downgraded.

  2. jiHymas says:

    1.4-1.5 is the old standard – many of the structures under review were, basically, grandfathered by DBRS, as far as I can tell. Used to be you could issue a $25.00 unit comprised of a $15 pref and a $10 capital share and get the Pfd-2 rating (e.g. PIC.PR.A).

    The new standard is 2.2:1.

    I believe that DBRS got a little tired of downgrading Pfd-2 issues when they blew up … see the table of downgrades in this article … which is not a formal transition analysis, but is an indication that the old standard wasn’t working very well.

  3. […] Asset coverage of 1.4+:1 as of March 13, according to Mulvihill. Under Review-Developing by DBRS. Now with a pre-tax bid-YTW of 7.38% based on a bid of 14.56 and a hardMaturity 2010-11-1 at 15.00. […]

  4. prefhound says:

    As I have noted before, the required asset coverage should be a function of the diversification of the underlying:
    Low (perhaps 1.5?) for an entire market index (e.g. TSX, perhaps income trusts, NYSE, etc.)
    Medium for a mutiple stock sector grouping (e.g. financials, oils, tech)
    High (perhaps 2+) for a few stock grouping in the same industry (5 banks)
    Super high (much greater than 2) for a single stock (e.g. BAM Split).

    It would not surprise me in the least to see BAM split slip a notch to Pfd 3H. Asset coverage has been falling for a year (though to “only” 3.3).

  5. jiHymas says:

    According to the DBRS publication “Rating Split Share Vehicles”, they do consider diversification, although they don’t give specifics. In “Split Share Issues: A Performance Overview”, they state that the rating on a split-share based on a single name will be constrained by the rating of the prefs issued directly by that name, which only makes sense.

    To get these publications, go to the DBRS site, click “Methodologies” and then scroll down to the “Split Shares and Funds” industry.

  6. realboomer says:

    I found the requirement of 1.4 – 1.5 asset coverage in the DBRS document “Methodology – Split Share Issuers: A Performance Overview” dated Jan 2007. The document states downside protection should be 40% – 50% for Pfd-2. I assumed that “downside protection” is the same as “asset coverage”.

    Can you provide the name/date of the DBRS reference which provides the new standard of 2.2 asset coverage for Pfd-2.

  7. jiHymas says:

    Downside protection is the amount the portfolio loses in the course of wiping out the capital shares. DBRS uses the terminology a lot because, I think, it makes it sound like they invented something, rather than using boring old 19th century “asset coverage”.

    If downside protection is “D”, then asset coverage, A = 1 / (1-D)

    D = 50% implies A = 2.0
    D = 40% implies A = 1.67

    As a matter of fact … no, I cannot provide you with any DBRS reference about the new standard! All I can do is point to current practice – for instance, the the rating of SBN.PR.A, the recent ABK.PR.B issue, the management of FIG.PR.A and, perhaps most tellingly, the partial redemption of EN.PR.A.

    So … my talk of the “new standard” is based on analysis, not an announcement, and I should have made that clear. Good catch!

  8. […] The issue is fully described on the fund’s website. The underlying portfolio is 15 US Financials, the asset coverage is only a little over 1.4:1 and the chance of a formal default is more than some might really be comfortable with – which is, presumably, why DBRS has them under review. […]

  9. […] mass review of Financial Split-Shares was discussed on Prefblog on March 19. The 2-notch downgrade of this issue – with asset coverage of 1.8+:1 and only 3 years […]

  10. […] CIR.PR.A is not tracked by HIMIPref™. The DBRS mass review of financial splitshares has been reported on PrefBlog. […]

  11. […] GBA.PR.A is not tracked by HIMIPref™. The DBRS mass review of financial splits was discussed on March 19. […]

  12. […] is significant – it is the first of the fourteen reviewed financial splits to be confirmed; the other four completed reviews (GBA.PR.A, CBW.PR.A, CIR.PR.A and ASC.PR.A) have […]

  13. […] is part of DBRS’ mass review of financial splits which, I believe, marks an end (or at least an increased strictness) to what I perceive as their […]

  14. […] is part of DBRS’ mass review of financial splits which, I believe, marks an end (or at least an increased strictness) to what I perceive as their […]

  15. […] is part of DBRS’ mass review of financial splits which, I believe, marks an end (or at least an increased strictness) to what I perceive as their […]

  16. […] follows announcement of the mass review of financial-based splits. RBS.PR.A is only the second issue to emerge unscathed; there have been seven downgrades with five […]

  17. […] would not normally be considered newsworthy, but I am tracking the effects of the DBRS mass review of financial split-shares. On 3/13, the asset coverage ratio was 1.6:1; as of June 19, the coverage is […]

  18. […] DBRS mass review of financial splits has been previously discussed. TXT.PR.A is not tracked by […]

  19. […] DBRS mass review of financial splits has been previously discussed. FBS.PR.B had a partial call for redemption in November, and was […]

  20. […] DBRS mass review of financial splits has been previously discussed. The issue was removed from the S&P/TSX Preferred Share Index […]

  21. […] credit crunch keeps rolling … portfolio values keep dropping … and last spring’s review is no longer […]

  22. […] was mentioned on PrefBlog in conncection with the DBRS March Review (not resolved) and the DBRS October Review. NBF.PR.A is not tracked by […]

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