PrefBlog

DBRS has announced that it:

has today downgraded the Preferred Shares issued by Copernican International Financial Split Corp. (the Company) to Pfd-4 (low), with a Negative trend, from Pfd-3.

In March and April of 2007, the Company raised gross proceeds of $158.4 million by issuing 7.92 million Preferred Shares (at $10 each) and an equal amount of Class A Shares (at $10 each). The initial structure provided downside protection of 50% to the Preferred Shares as all issuance costs were paid by AIC Investment Services Inc. (the Manager).

The net proceeds from the offering were used to invest in a portfolio of common shares (the Portfolio) issued by international financial institutions (IFS) with strong credit quality. The Portfolio is actively managed by the Manager to invest in IFS that have at least a US$1 billion market capitalization and exhibit the potential for attractive dividend yields and strong earnings growth momentum. It is expected that a minimum of 80% of all foreign content will be hedged back to Canadian dollars at all times to mitigate net asset value (NAV) volatility relating to foreign currency exchange fluctuation.

Holders of the Preferred Shares receive fixed cumulative quarterly dividends yielding 5.0% per annum. The Company aims to provide holders of the Class A Shares with monthly distributions targeted at 8.0% per annum.

There is an asset coverage test in place that does not permit the Company to make monthly distributions to the Class A Shares if the dividends on the Preferred Shares are in arrears or if the NAV of the Portfolio is less than $16.50 after giving effect to such distributions. Furthermore, the Company cannot make special distributions to the Class A Shares if the NAV drops to less than $20 unless the distribution is required to eliminate tax on net capital gains. Since the Company’s NAV has decreased below $16.50, distributions to the Class A Shares are currently suspended, which greatly reduces the grind on the Portfolio going forward. The Company is currently required to generate a return of approximately 2% from sources other than dividend income to maintain a stable NAV. The required return will vary based on fluctuations in the Portfolio’s NAV and changes in the dividend policies of the IFS.

The credit quality of the Portfolio is strong and globally diversified, but the NAV of the Portfolio has experienced downward pressure due to its concentration in the global financial industry. Since inception, the NAV has dropped from $20 to $11.20 (as of June 30, 2008), a decline of 44%. As a result, the current downside protection available to the Preferred Shareholders is approximately 11%.

The downgrade of the Preferred Shares is primarily based on the greatly reduced asset coverage available to cover repayment of the Preferred Shares principal. The Negative rating trend is due to the additional return required to avoid further deterioration in the Company NAV.

The redemption date for both classes of shares issued is December 2, 2013.

This follows a downgrade to Pfd-3 on April 17. CIR.PR.A is not tracked by HIMIPref™.

This entry was posted on Wednesday, July 2nd, 2008 at 4:37 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.