BSD.PR.A: DBRS Downgrades to Pfd-5

DBRS has announced that it:

has today downgraded the Preferred Securities issued by Brascan SoundVest Rising Distribution Split Trust (the Trust) to Pfd-5, with a Negative trend, from Pfd-2. The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In March 2005, the Trust raised gross proceeds of $180 million by issuing 7.2 million Preferred Securities (at $10 each) and an equal number of Capital Units (at $15 each). The initial split share structure provided downside protection of 58% to the Preferred Securities (after expenses).

The net proceeds from the initial offering were invested in a diversified portfolio of Canadian income trusts (the Portfolio). Holders of the Preferred Securities receive fixed quarterly interest payments yielding 6% annually. The Capital Units received regular monthly cash distributions from April 2005 to September 2008. The Trust may not make any cash distributions on the Capital Units if the asset coverage available to the Preferred Securities would be less than 1.4 times after giving effect to the proposed distribution. Due to a large decline in the net asset value (NAV) during September and October, the Capital Unit distribution was suspended for the first time in October 2008.

Based on the 2008 interim financial statements, the interest coverage ratio available to the holders of the Preferred Securities was over 2.5 times. This ratio will vary depending on the distributions from the Trust’s underlying holdings.

The NAV of the Trust has declined significantly in the last few months. From August 29, 2008, to November 28, 2008, the NAV of the Trust dropped from $16.35 to $8.72, a decline of about 47%. As a result, all of the initial downside protection available to the Preferred Securities has been eroded. As of November 28, 2008, holders of the Preferred Securities would have experienced a loss of approximately 13% of their initial issuance price if the Portfolio holdings had been liquidated and proceeds distributed. As a result of the large decline in asset coverage, DBRS has downgraded the rating of the Preferred Securities to Pfd-5 with a Negative trend.

The redemption date for the Preferred Securities is March 31, 2015.

BSD.PR.A was part of the DBRS Mass Review of Splits. Retractions and the Capital Unit dividend were suspended in October. The reported NAV has been extremely volatile lately.

BSD.PR.A is tracked by HIMIPref™ and is part of the InterestBearing subIndex. Given the downgrade, it will be relegated to “Scraps” at the December month-end rebalancing.

This issue has been the topic of much discussion on PrefBlog over the past few months. Assiduous Reader prefhound takes the view that the vaunted income coverage will decline considerably in the near future.

5 Responses to “BSD.PR.A: DBRS Downgrades to Pfd-5”

  1. prefhound says:

    One reason the “reported NAV has been extremely volatile lately” is that the underlying portfolio is a bunch of really weak income trusts, several of which have already eliminated distributions and 12% of the value is priced under $2/share.

    Another reason is that it is nearly half invested in oil&gas trusts, which have fallen, though not yet by the price of oil — which I see at $36 soon (6X natural gas; the historical relationship).

    The real disappointment is that BSD.PR.A trades at 40%+ discount to NAV, with very little prospect of restructuring or redemption opportunity for 7 more years — all so the manager can continue to earn his fees. [But also because the underlying holdings are 3-10% of the public float of some of these income trusts and challenging to sell — in a fund with only $45M in assets!] Unfortunately, I suspect 2015 NAV will have a hard time exceeding the current market price once trust distributions reach a much lower equilibrium.

    Toxic, toxic on top of toxic! I should have done better due diligence for my original purchase instead of relying on the formulaic Pfd-2 rating and (I hate to say it because I still love it, also relying on PrefLetter)! It seems none of us can do enough due diligence on our own (including the pros), so my attempt to diversify by Pref type blew up in this case.

  2. prefhound says:

    Just estimated closing NAV at $7.86 (assuming Sep 30 holdings). Market value for BSD.UN = $0.40 (yesterday) and BSD.PR.A = $4.30 is $4.70 per unit — a 40% discount. Where is retraction when we need it?

    Anyway, despite my downbeat comments on this particular issue, by all means please keep up your unique and valuable assessment of the pref and financial goings on — it’s a breath of fresh air in a mighty stale market!

  3. […] money on the table. In this case, however, the company suspended retraction rights prior to being downgraded to Pfd-5 by DBRS in December. The suspension of retractions was permitted by the prospectus, but was not mandatory, […]

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