PrefBlog

DBRS has announced:

has today downgraded the Preferred Shares issued by GlobalBanc Advantaged 8 Split Corp. (the Company) to Pfd-5 (low), with a Negative trend, from Pfd-5. The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In June 2007, the Company raised gross proceeds of $54 million by issuing 2.7 million Preferred Shares (at $10 each) and an equal number 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 Class A Shareholders have received a total of $0.0485 per share, a return of less than 0.5% of the initial share price.

The NAV of the Portfolio has declined sharply since inception. On July 2, 2008, DBRS downgraded the Preferred Shares to Pfd-5 when the NAV of the Preferred Shares was $9.70 (slightly below the par value of the Preferred Shares). Since then, the NAV has declined to $7.74 (a 20% decrease). As of November 3, 2008, holders of the Preferred Shares would have experienced a loss of approximately 23% of their initial issuance price if the Portfolio holdings had been liquidated and proceeds distributed. The Portfolio requires an annualized return of more than 11% for the remaining term of the Company (about four years) in order to pay all cumulative dividends and full principal with respect to the Preferred Shares on the final maturity date. These returns will need to be generated from dividend income and capital appreciation in the Portfolio’s holdings.

There is now a significant chance that holders of the Preferred Shares will experience losses. DBRS will not lower its rating to D until it becomes clear that losses are unavoidable. Since there are still four years remaining until final maturity, there is sufficient time for the Portfolio NAV to increase above the $10 Preferred Shares issuance price through capital appreciation.

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

GBA.PR.A was reviewed as part of the DBRS Mass Review of Splits.

GBA.PR.A is not tracked by HIMIPref™.

This entry was posted on Thursday, November 6th, 2008 at 6:46 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.