OSP.PR.A Downgraded to Pfd-5 By DBRS

DBRS has announced that it:

downgraded the rating of the Preferred Shares issued by Brompton Oil Split Corp. (the Company) to Pfd-5 from Pfd-4 (low). The Company invests in common shares of at least 15 large capitalization North American oil and gas issuers (the Portfolio) selected from the S&P 500 Index and the S&P/TSX Composite Index. The Company may also invest up to 25% of the Portfolio value in the common shares of issuers listed on the S&P 500 Index or the S&P/TSX Composite Index that satisfy its investment criteria, operating in energy subsectors including equipment, services, pipelines, transportation, and infrastructure. The Portfolio is approximately equally weighted, actively managed, and rebalanced at least semi-annually. A portion of the Portfolio’s investments are denominated in U.S. dollars; however, substantially all of this exposure is hedged back to Canadian dollars. The Company has the ability to write covered call options or engage in securities lending in order to generate additional income.

The dividend coverage ratio was approximately 0.3 times as of December 11, 2019.

As of December 11, 2019, the downside protection available to holders of the Preferred Shares was 0.6%. It has averaged around this level in the last three months as a result of depressed prices of energy stocks and the oil market struggling to recover from lower demand and oversupply. Subsequently, because of the downside protection reduction below acceptable levels for a prolonged period of time and weak dividend coverage, which creates further grind on the Portfolio, DBRS Morningstar downgraded the rating on the Preferred Shares to Pfd-5.

The maturity date of the Preferred Shares is March 31, 2020. On March 9, 2019, the Company announced an extension of the term for another three to five years. The details of the term extension will be announced at least 60 days before the maturity date.

The Whole Unit NAVPU was 10.92 as of December 23, according to Brompton’s figures for the Capital Unit NAVPU and Preferred Share NAVPU, for an Asset Coverage Ratio of 1.1-:1, equivalent to Downside Protection of about 8%. It’s not clear to me how the DBRS figure of 0.6% was derived.

5 Responses to “OSP.PR.A Downgraded to Pfd-5 By DBRS”

  1. gsp says:

    It’s not clear to me how the DBRS figure of 0.6% was derived.

    I can’t confirm specifics on the 11th but capital units NAV has been 0 a few times recently with even the pref’s NAV dropping below (par + accumulated div).

  2. jiHymas says:

    Now I see the data. The NAVPU for the Capital Units only was $0.06 on December 11. On the linked page, click “Performance” and then “NAV History”.

  3. skeptical says:

    It’s interesting that even in face of such disastrous performance of the underlying portfolio, Preferreds are still trading as well as they are. The market seems to like these preferred shares more than the credit rating agencies.
    Question- At what point would Brompton simply call it quits with this fund? Or would they keep on milking their fees till they have eaten away everything?
    Is there something in their prospectus that says the NAV can’t fall below a certain value?

  4. mbarbon says:

    I believe these prefs (other than OSP at the present time) offer more protection to the downside when compared to rate-reset because there is actually $$$ supporting their price as opposed to a company promise to pay the dividends.

    In addition, the interest rate on these prefs are reset every few years to current rates. Also, there is usually at least one time a year to redeem these shares for its NAV.

    I have followed quite of few of these, and they rarely trade for much less than their issue price. OSP has been the exception because the shares held are influenced greatly by the price of OIL. With the buffer of the NAV of the class A shares, one has plenty of advance knowledge of any possibility of the NAV dropping below the issue price.

  5. mbarbon says:

    For example purposes only (see note above)…

    LBS.PR.A is backed by the 10 biggest financial companies (equally weighted)… These shares have to drop 40% before NAV of pref is impaired. Currently earning 5.26% (trading at 2% premium).

    These splits share resets probably acts more like the more recent Rate Resets.
    However, most of the older Fixed Resets have HUGE capital gain possibilities.

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