SBC.PR.A to Reset at 5.00%

Brompton Group has announced:

Brompton Split Banc Corp. (the “Fund”) announces that the distribution rate for the Preferred Shares for the 5 year term from December 1, 2017 to November 29, 2022 will be $0.50 per annum (5.0% on the original issue price of $10) payable quarterly. The Preferred Share distribution rate is based on current market rates for preferred shares with similar terms. In addition, the Fund intends to maintain the targeted monthly Class A Share distribution rate at $0.10 per Class A Share. The Fund previously announced the extension of the term of the Class A Shares and the Preferred Shares from November 29, 2017 to November 29, 2022. The term extension offers Preferred shareholders the opportunity to enjoy preferential cash dividends until November 29, 2022. Since inception in November 2005 to August 31, 2017, the Preferred share has delivered an attractive 5.1%(1) per annum return.

Since inception and over the 1, 3, 5 and 10 year periods to August 31, 2017, the Class A share has significantly outperformed both the S&P/TSX Capped Financials Index and the S&P/TSX Composite Index as shown in the table below.

Annual Compound Returns 1-Year 3-Year 5-Year 10-Year Since Inception
Brompton Split Banc Corp. – Class A 20.5% 7.9% 19.3% 10.3% 11.1%
S&P/TSX Capped Financials Index 15.8% 7.1% 14.2% 7.0% 8.1%
S&P/TSX Composite Index 7.2% 2.1% 8.1% 4.1% 6.1%

Since inception to August 31, 2017, Class A shareholders have also received cash distributions of $13.65 per share. Class A shareholders have the option to benefit by reinvesting their cash distributions in a distribution reinvestment plan (“DRIP”) which is commission free to participants. Class A shareholders can enroll in the DRIP program by contacting their investment advisor.

Brompton Split Banc Corp. invests in a portfolio, on an approximately equal weight basis, in common shares of six Canadian Banks: Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank.

In connection with the extension, shareholders who do not wish to continue their investment in the Fund, may retract their Preferred Shares or Class A Shares on November 29, 2017 pursuant to a special retraction right and receive a retraction price that is calculated in the same way that such price would be calculated if the Fund were to terminate on November 29, 2017. Pursuant to this option, the retraction price may be less than the market price if the security is trading at a premium to net asset value. Notice must be provided to your investment dealer by October 31, 2017 at 5:00 p.m. (Toronto time) in order to exercise this right; however, investment dealers may have earlier deadlines.

Well, sure the Capital Units have outperformed their indices over the last ten years. The market’s gone up substantially – if a leveraged investment hasn’t outperformed, then that would be a problem! A better – although by no means ‘good’ – indicator is the performance of the Whole Units against the index, and it is very pleasant to learn that as of the Fund’s 2016 Year-End, the Whole Units also outperformed the cited indices, although by much more modest amounts. That’s still not the greatest comparison, however, since the indices are the Composite – including everything – and the Capped Financial index, which includes insurance companies as the biggest non-bank chunk. Brompton Lifeco Split Corp. has not done quite as well!

However, I must emphasize that I am saying this only in reaction to the excessive bragging about performance in the press release. SBC & SBC.PR.A are fine products and the latter is frequently among the recommendations in my monthly newsletter. It does what it’s supposed to do and it does it cheaper than most, as disclosed in the 2016 Annual Report:

The MER per unit, excluding Preferred share distributions (which were covered by the portfolio’s dividend income), was 0.99% for 2016 and 0.97% for 2015. This ratio is more representative of the ongoing efficiency of the administration of the Fund.

SBC.PR.A was added to the HIMIPref™ universe in 2008. It was originally scheduled for redemption in 2012, but was extended with a coupon of 4.5%. The new coupon rate of 5.0% should, I think be sufficient to ensure that it continues to trade at a slight premium to par. On that basis, a recommendation not to retract will be superfluous, but if disaster strikes I will post something before the October 31 retraction notification deadline.

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