PrefBlog

DBRS has announced that it:

has today downgraded the Preferred Shares issued by GlobalBanc Advantaged 8 Split Corp. (the Company) to Pfd-5, with a Stable trend, from Pfd-4 (high).

In June 2007, the Company raised gross proceeds of $54 million by issuing 2.7 million Preferred Shares (at $10 each) and an equal amount of Class A Shares (at $10 each), to provide downside protection of approximately 47% to the Preferred Shares (after issuance costs).

The net proceeds from the initial offering were used to purchase a portfolio of Canadian securities that were pledged to the National Bank of Canada (the Counterparty) to enter a forward agreement (the Forward Agreement) in order to gain exposure to a portfolio of common shares (the Bank Portfolio) issued by eight of the world’s largest banks, Citigroup Inc., Bank of America Corp. (DE), Royal Bank of Scotland Group plc, UBS AG, Banco Santander Central Hispano S.A., BNP Paribas, Société Générale Group and Deutsche Bank AG.

Holders of the Preferred Shares receive fixed cumulative quarterly distributions equal to 4.5% per annum. The Company provides Class A Shareholders with distributions of capital gains when declared by the Board of Directors. Since inception, the Capital Shareholders have received a total of $0.0485 per share, a return of less than 0.5% of the initial share price.

Based on the most recent dividends paid by its underlying companies, the Bank Portfolio can generate enough yield to pay the fixed preferred distributions and other annual expenses. However, changes in dividend policy by any of the banks included in the Bank Portfolio could cause a potential grind on the net asset value (NAV).

Since inception, the NAV has dropped from about $19 to $9.70 (as of June 30, 2008), a decline of nearly 50%. Since the NAV is currently below the $10 principal value of the Preferred Shares, the holders of the Preferred Shares would experience a loss of 3% of their initial investment if the portfolio were to be liquidated and proceeds distributed. The decline in NAV can be attributed to the Bank Portfolio’s 100% concentration in the international banking industry, as well as its exposure to those banks that have experienced credit writedowns during the past year.

The downgrade of the Preferred Shares is primarily based on the lower level of asset coverage available to cover the Preferred Shares principal.

The redemption date for both classes of shares issued is December 15, 2012.

This follows a downgrade to Pfd-4(high) on April 17. Anybody feeling like swearing at the Credit Rating Agencies? It was rated Pfd-2 until January 17, 2008 … that’s fast, eh? Pfd-2 (reasonable investment grade) to Pfd-5 (deep junk) in less than six months. Even the sternest critics will agree, I’m sure that losing half your money in a year while invested in …

a portfolio of common shares (the Bank Portfolio) issued by eight of the world’s largest banks, Citigroup Inc., Bank of America Corp. (DE), Royal Bank of Scotland Group plc, UBS AG, Banco Santander Central Hispano S.A., BNP Paribas, Société Générale Group and Deutsche Bank AG

… is a tad unusual. If there is such a thing, I wonder how “GlobalBanc Disadvantaged 8 Split Corp.” is doing!

GBA.PR.A is not tracked by HIMIPref™.

Update: The company has stated:

Current Net Asset Value (“NAV”) per Unit is $9.70, comprised of $9.70 per Preferred Share and $0.00 per Class A Share. Since the NAV per Unit is currently below the $10 principal value of the Preferred Shares, the holders of the Preferred Shares would receive less than $10 if the portfolio were to be liquidated and proceeds distributed as at today’s date. Based on the most recent dividends paid by the underlying companies, the Bank Portfolio currently generates enough yield to pay the fixed cumulative quarterly preferred dividends in the amount of $0.1125 per Preferred Share and the expenses of the Company. However, future changes in dividend policy by any of the banks included in the Bank Portfolio, among other things, may require the Company to further reduce NAV per Unit in order to sustain the dividend on the Preferred Shares. The redemption price payable for each Preferred Share outstanding on December 15, 2012 (the final redemption date) is equal to the lesser of: (i) $10.00 plus accrued and unpaid distributions; and (ii) the NAV per Preferred Share on that date.

This press release is not yet available on the company’s website.

This entry was posted on Wednesday, July 2nd, 2008 at 4:52 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.