TXT.PR.A Downgraded to Pfd-3(high) by DBRS

DBRS has today:

downgraded the Preferred Securities issued by Top 10 Split Trust (the Trust) to Pfd-3 (high) , with a Stable trend, from Pfd-2 (low). The rating has been removed from Under Review with Developing Implications where it was placed on March 19, 2008.

In February and March of 2006, the Trust raised gross proceeds of approximately $70 million by issuing 2.72 million Preferred Securities at $12.50 each and an equal number of Capital Units at $13.10 each. The net proceeds from the offering were invested in a portfolio of common shares (the Portfolio) that included the six largest Canadian chartered banks (Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and The Toronto-Dominion Bank) and the four largest Canadian life insurance companies (Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc., Manulife Financial Corporation and Sun Life Financial Inc.). The Portfolio is actively managed by Mulvihill Capital Management Inc., and the Trust will generally invest not less than 5% and not more than 15% of its assets in the securities of each issuer in the Portfolio. The initial split share structure provided downside protection of approximately 48% to the Preferred Securities (after expenses).

The holders of the Preferred Securities receive fixed quarterly distributions equal to 6.25% per annum. The interest payments on the Preferred Securities are funded from the dividends received from the Portfolio, covered call option premium income and, if necessary, with proceeds from the sale of the Portfolio’s shares. Holders of the Capital Units receive regular quarterly cash dividends targeted to yield 7.5% of the net asset value (NAV) of the Trust per annum. Basing the distributions on the NAV of the Trust reduces the hurdle rate for the Trust and its requirement to write more options in the event of a declining NAV. The Trust is currently required to generate a return of about 5% from sources other than dividend income in order to maintain a stable NAV.

The Trust’s NAV has experienced downward pressure over the past year, dropping from $23.87 per share to $19.61, a decline of about 18%. The current downside protection available to the Preferred Shareholders is approximately 36% (as of June 12, 2008). The downgrade of the Preferred Securities is primarily based on the reduced level of asset coverage available to cover the Preferred Securities principal.

The DBRS mass review of financial splits has been previously discussed. TXT.PR.A is not tracked by HIMIPref™.

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