PrefBlog

DBRS has announced:

BRS Limited (DBRS Morningstar) downgraded its rating on the Preferred Shares issued by Brompton Split Banc Corp. (the Company) to Pfd-3 from Pfd-3 (high). The Preferred Shares have experienced a drop in downside protection (to 46.8% in July 2023 from 50.2% in July 2022) as a result of the decline in the portfolio’s net asset value (NAV) in response to the volatility in the stock market, which was triggered by the mix of the global high inflationary environment, tighter monetary policies, and various geopolitical events, such as the Russia-Ukraine war.

The Company invests in a portfolio of common shares (the Portfolio) issued by the six major banks in Canada—Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and The Toronto-Dominion Bank—and one exchange-traded fund (ETF), Brompton North American Financials Dividend ETF. Up to 10% of the Portfolio may be invested in global financial companies from time to time. The Portfolio portion allocated to the major banks remains approximately equally weighted.

Distributions on the Preferred Shares are made quarterly in the amount of $0.15625, yielding 6.25% annually on the original $10.00 issue price. Distributions on the Class A Shares are made monthly in the amount of $0.10 per share. No monthly distributions to the Class A Shares will be made if distributions to the Preferred Shares are in arrears or the NAV of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares.

As of July 27, 2023, the downside protection stood at 46.8% compared with 50.2% as on July 31, 2022. Dividend coverage based on the current dividend yield on the portfolio was 1.3x. Without giving consideration to the capital appreciation potential or any source of income other than the dividends earned by the portfolio, the targeted monthly distributions to the Class A Shares are likely to create a grind on the portfolio’s NAV equivalent to 5.7% over the remaining term to maturity. The Company can write covered call options for some or all of the portfolio’s common shares to generate additional income to supplement the dividends received on the portfolio. In addition, the Company may enter into Securities Lending Agreements in order to generate an alternative source of income.
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The main constraints to the rating are the following:

(1) The downside protection available to holders of the Preferred Shares depends on the value and dividend policies of the securities in the portfolio. In current times, valuation is exposed to market fluctuations resulting from sticky inflation, economic slowdown, and the Russia-Ukraine war.

(2) Volatility of price and changes in the dividend policies of the underlying issuers may result in significant reductions in the Preferred Shares’ dividend coverage or downside protection from time to time.

(3) The Company relies on the portfolio manager to generate additional income, through option writing, to meet distributions and other trust expenses without having to liquidate the portfolio’s securities.

(4) Stated monthly distributions on the Class A Shares will likely create a grind on the portfolio. This risk is mitigated by an asset coverage test of 1.5x that ensures sufficient levels of downside protection to the holders of the Preferred Shares.

This entry was posted on Tuesday, August 8th, 2023 at 7:20 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.