DBRS has announced that it:
has today downgraded the Preferred Shares issued by SL Split Corp. (the Company) to Pfd-4 (low), with a Stable 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 November 2007, the Company raised gross proceeds of $59.4 million by issuing 1.055 million Preferred Shares (at $25.78 each) and 2.11 million Capital Shares (at $15.26 each). The initial split share structure provided downside protection of 52% to the Preferred Shares (after expenses).
The net proceeds from the initial offering were invested in a portfolio of common shares (the Sun Life Shares) of Sun Life Financial Inc. (Sun Life). Dividends received from the Sun Life Shares are used to pay a fixed, cumulative quarterly dividend to the holders of the Preferred Shares yielding 5.00% annually. Excess dividends net of all expenses of the Company may be paid as dividends on the Capital Shares. The current dividend income on the Sun Life Shares less administration fees and other Company expenses is approximately equal to the cost of the Preferred Shares distributions.
The value of the Sun Life Shares has declined significantly since inception. Sun Life announced a third-quarter loss due to writedowns of $636 million from holdings in Lehman Brothers Holdings Inc., Washington Mutual, Inc. and American International Group, Inc (AIG), as well as $326 million in charges from the decline in equity markets. From November 7, 2007, to December 3, 2008, the net asset value (NAV) of the Company dropped from $53.31 to $24.87, a decline of about 53%. As a result, all of the initial downside protection available to the Preferred Shares has eroded. As of December 3, 2008, holders of the Preferred Shares would have experienced a loss of approximately 3.5% of their initial issuance price if the Sun Life Shares had been liquidated and proceeds distributed. However, the credit quality of Sun Life remains strong as DBRS confirmed its senior unsecured debt rating at AA (low) with a Stable trend on July 9, 2008.
As a result of the large decline in asset coverage, DBRS has downgraded the rating of the Preferred Shares to Pfd-4 (low) with a Stable trend. A main constraint to the rating is that volatility of the common share price and changes in the dividend policies of Sun Life may result in reductions in asset coverage or dividend coverage from time to time.
The redemption date for both classes of shares issued is January 31, 2013.
SLS.PR.A was part of the DBRS Mass Review of Splits. It is not tracked by HIMIPref™.
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