PrefBlog

DBRS has announced it:

has today downgraded the Preferred Shares issued by US Financial 15 Split Corp. (the Company) to Pfd-5 from Pfd-3, with a Negative trend.
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Lehman Brothers Holdings Inc. (Lehman) and Washington Mutual, Inc. (WaMu) were two of the Portfolio’s core holdings…Also, American International Group, Inc. and Wachovia Corporation are two of the Portfolio’s core holdings.
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As of September 15, 2008, the NAV of the Company was $10.33, declining about 50% over the past year. As a result, the downside protection available to the Preferred Shareholders is approximately 3%. The decrease in the capital protection available has resulted in a downgrade of the rating of the Preferred Shares. The revised rating is based on the downside protection available to holders of the Preferred Shares (3%) and the asset coverage test limiting distributions to the Class A Shares.

The main challenges to the rating are the following:

(1) The protection provided to holders of the Preferred Shares is dependent on the value of the common shares of the Portfolio.

(2) The volatility of price and changes in the dividend policies of the Portfolio Companies and potential erosion of the Portfolio under challenging market conditions may result in significant reductions in downside protection from time to time.

(3) The Portfolio is entirely concentrated in the US financials industry.

(4) There is a reliance on option writing to generate income.

(5) There is a risk of fluctuation in the NAV of the Portfolio due to unhedged U.S. currency exposure.

The trend is Negative due to the additional return required in order to maintain a stable NAV.

The redemption date for both classes of shares issued is December 1, 2012.

FTU.PR.A was last mentioned on PrefBlog in connection with LEH debacle. FTU.PR.A is tracked by HIMIPref™ and is a member of the “Scraps” index. It would be part of the “SplitShare” index, but there are credit concerns.

At this point, the prefs have basically full exposure to the portfolio and are effectively short a call at $10. On the other hand, they are currently quoted at 6.21-71 … so there is also a discount to NAV.

Update, 2008-9-30: The company is sufficiently alarmed that it has issued a portfolio update.

This entry was posted on Tuesday, September 30th, 2008 at 12:44 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.