DBRS has announced that it:
has today downgraded the Preferred Shares issued by AIC Global Financial Split Corp. (the Company) to Pfd-5, with a Negative trend, from Pfd-2 (low). The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.
In 2004, the Company issued 1.6 million Preferred Shares at $10 each and 1.6 million of Class A Shares at $15 each. The initial structure provided downside protection of approximately 58% (net of expenses).
The net proceeds from the offering were invested in a portfolio (the Portfolio) that included equity securities selected from leading bank-based, insurance-based and investment management based financial services companies with strong credit ratings. The Portfolio is actively managed by AIC Investment Services (the Manager) to invest in companies that have at least a US$1 billion market capitalization, and the weighted-average credit rating of the Portfolio will be at least equivalent to “A” at all times. To mitigate net asset value (NAV) volatility relating to foreign currency exchange fluctuation, it is expected that a minimum of 90% of all foreign content will be hedged back to Canadian dollars for the life of the transaction. The Manager also employs an option-writing strategy (covered calls and cash-covered puts) to generate additional income.
Holders of the Preferred Shares receive fixed cumulative quarterly dividends yielding 5.25% 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 $15 after giving effect to such distributions. Consequently, Class A distributions were suspended in September 2008.
The NAV of the Portfolio has declined significantly since inception. On April 17, 2008, DBRS downgraded the Preferred Shares to Pfd-2 (low), when the downside protection available to the Preferred Shares was 46%. Since then, the NAV has declined from $18.45 to $9.93 (a 46% decrease). The Preferred Shares have lost all of their downside protection and consequently have a significantly higher probability of experiencing first-dollar loss.
After taking into consideration the suspension of the Class A distributions, the Portfolio currently requires a total annualized return of more than 7% for the remaining term of the Company (about 2.5 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, option writing or capital appreciation in the Portfolio’s holdings.
Given the high hurdle rate and the grind to the portfolio, DBRS has assigned a Negative trend to the rating of the Preferred Shares.
The redemption date for both classes of shares issued is May 31, 2011.
ASC.PR.A was reviewed as part of the Mass DBRS Review of Splits
ASC.PR.A is tracked by HIMIPref™. It was moved from the SplitShare subindex to “Scraps” at the April 2007 Rebalancing on volume concerns.
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