DBRS Limited (DBRS Morningstar) upgraded the rating on the Preferred Shares issued by Canadian Banc Corp. (the Company) to Pfd-3 (high) from Pfd-3. The Company invests in a portfolio of common shares (the Portfolio) issued by the six largest Canadian banks: Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and The Toronto-Dominion Bank. Each of the six banks generally represents no less than 5% and no more than 20% of the net asset value (NAV) of the Portfolio. In addition, up to 20% of the Portfolio’s NAV may be invested in equity securities of Canadian or foreign financial services corporations other than the banks listed above.
Dividends received from the Portfolio are used to pay to holders of the Preferred Shares floating cumulative monthly dividends at a rate per annum equal to the prevailing prime rate in Canada plus 1.5%, with a minimum annual rate of 5% and a maximum annual rate of 8%. Holders of Class A Shares are entitled to receive monthly cash distributions targeted to be 10% annually based on the volume-weighted average market price of the Class A Shares for the last three trading days of the preceding month.
DBRS Morningstar expects the monthly cash distributions to the holders of the Class A Shares and operating expenses to cause an average grind on the Portfolio’s NAV of approximately 5.6% until the end of the term. An asset coverage test in place mitigates the effects of the grind by not permitting the Company to make monthly distributions to the Class A Shares if the dividends of the Preferred Shares are in arrears or if the NAV of the Portfolio falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. In addition, no special distributions can be made to the Class A Shares if, after such distributions, the NAV is below $25. This ensures a sufficient level of protection to the holders of the Preferred Shares.
The main form of credit enhancement available to the Preferred Shares is a buffer of downside protection. The amount of downside protection available to the Preferred Shares as of July 15, 2021, was 56.8%. Although the credit quality of the underlying assets of the Portfolio is strong, the Portfolio is concentrated in the financial services industry. The floating nature of dividend distributions to the Preferred Shares and Class A Shares, while mitigated by predetermined ranges of dividend yields, may potentially increase the volatility of the protection available to holders of the Preferred Shares in a high interest rate environment. The Preferred Share dividend coverage ratio was approximately 1.0x.
The maturity date is December 1, 2023. On maturity, the holders of the Preferred Shares will be entitled to the value of the Portfolio, up to the face value of the Preferred Shares, in priority to the holders of the Class A Shares. The Class A Shareholders will receive the remaining value of the Company. The term may be extended beyond the termination date for additional terms of five years each as determined by the Company’s board of directors.
The amount of downside protection, dividend coverage, and time remaining until maturity warranted an upgrade to the rating on the Preferred Shares to Pfd-3 (high) from Pfd-3.
DBRS Morningstar also considered the following constraints to the rating:
(1) The reliance on the Portfolio manager to generate additional income through methods such as option writing.
(2) The monthly cash distributions to holders of the Class A Shares.
(3) The dependence of the downside protection available to holders of the Preferred Shares on the value of the underlying common shares, which are subject to share price volatility.
(4) Market fluctuations resulting from the response to the worldwide spread of the Coronavirus Disease (COVID-19) that could negatively affect the Company’s NAV.
The rating includes additional analysis of the Company’s expected performance as a result of the global efforts to contain the coronavirus. The DBRS Morningstar sovereigns group initially published its outlook on the pandemic’s impact on key economic indicators for the 2020–22 time frame on April 16, 2020. DBRS Morningstar last updated the macroeconomic scenarios on June 18, 2021, in its “Global Macroeconomic Scenarios – June 2021 Update.” For details, see https://www.dbrsmorningstar.com/research/380281.
BK.PR.A Upgraded to Pfd-3(high)
DBRS has announced (on 2021-7-27):
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