Yet ANOTHER DBRS Mass Review of Splits

DBRS has announced that it:

has today placed the rating of certain structured preferred shares (Split Shares) Under Review with Negative Implications. Each of these split share companies has invested in a portfolio of securities (the Portfolio) funded by issuing two classes of shares – dividend-yielding preferred shares or securities (the Preferred Shares) and capital shares or units (the Capital Shares). The Preferred Shares benefit from a stable dividend yield and downside principal protection via the net asset value (NAV) of the Capital Shares against the percentage loss in the Portfolio’s NAV. Preferred Shares have experienced significant declines in downside protection during the past number of months due to volatility in the global equity markets. As a result, DBRS has placed the Preferred Shares listed below Under Review with Negative Implications. DBRS will take final rating action on these Preferred Shares once a longer-term trend has been established for the NAVs of the affected split share companies.

They note that analysis will be performed according to the methodology of 2007

They do not explicitly list the affected splits in the main text, but they do have a list of related issues. On the assumption that there is a one-to-one relationship, the following table may be prepared.

DBRS Review Announced 2008-12-19
Ticker Rating Asset
ABK.PR.B Pfd-2(low) 1.3+:1
Issue Closes None
TDS.PR.B Pfd-2(low) 1.5-:1
Microscopic Redemption Scraps
FTN.PR.A Pfd-2 1.4-:1
No Fear! SplitShare
BMT.PR.A Pfd-2(low) 1.1+:1
Partial Call Scraps
MST.PR.A Pfd-2(low) 1.3+:1
Capital Unit Dividend Suspended Scraps
FFN.PR.A Pfd-2(low) 1.1+:1
Capital Unit Dividend Suspended SplitShare
EN.PR.A Pfd-2(low) 1.4+:1
Partial Redemption Scraps
BXN.PR.B Pfd-2(low) 1.6-:1
Partial Redemption None
PPL.PR.A Pfd-2 1.4-:1
Added to HIMIPref™ SplitShare
LSC.PR.C Pfd-2 1.4-:1
Partial Redemption None
BSC.PR.A Pfd-2(low) 1.4+:1
Partial Redemption None
SBC.PR.A Pfd-2 1.3+:1
Added to HIMIPref™ SplitShare
PDV.PR.A Pfd-2 1.3+:1
None None
SOT.PR.A Pfd-2(low) 1.4+:1
None None
BBO.PR.A Pfd-2 1.6+:1
Rights Offering None
LBS.PR.A Pfd-2 1.3-:1
Analysis SplitShare
RBS.PR.A Pfd-2(low) 1.2-:1
Tiny Redemption None
LCS.PR.A Pfd-2 1.2+:1
Analysis None

The previous DBRS Review of Splits has not yet been completed. All these are new.

10 Responses to “Yet ANOTHER DBRS Mass Review of Splits”

  1. lystgl says:

    Ok, LBS.PR.A in ‘preferreds for dummies” vernacular?
    Thanks eh!

  2. jiHymas says:

    Sorry … I must be slow today, but I don’t understand your comment!

  3. lystgl says:

    LBS.PR.A is on the list of “about to be or may be” downgraded. I was just wanting, in terms I can understand, to know why. You must have seen all the yellow covered “_____for dummies” books that used to be around? You may want to write one entitled,” Preferreds for Dummies” as the titles of these books, though deprecating, usually are anything but. I’d buy one.

  4. jiHymas says:

    Oh, OK, gotcha.

    LBS.PR.A is backed by a portfolio of the Big 6 Banks and Big 4 Insurers. This is better than being backed by a single financial issuer, but is worse than the backing of a fully diversified portfolio.

    Equity market declines have eroded the asset coverage of the portfolio to a mere 1.279:1 as of December 18. In DBRS terminology, thats “Downside Protection” of about 22% … in other words, if the portfolio declines by another 22%, then the Capital Units will have no intrinsic value (they will have option value) and the Preferred Shares will be fully exposed to further declines in portfolio value. Worse … when the NAV per Unit is $10, they have full downside exposure but no upside, as increases in the portfolio above that point will belong to the Capital Units.

    The DBRS guideline (which is influenced by other factors, such as the nature of the underlying portfolio and income coverage) for a Pfd-2/Pfd-2(low) rating is downside protection of 40-50%. Since LBS.PR.A is currently below that figure, they’re reviewing it … and if there are no extenuating factors, they’ll cut the rating.

    When we look at their most recent financial statements, we find that all the declared income looks sustainable – it’s nearly all dividends, with minor contributions from securities lending and interest income. There’s no one-off stuff in there, and no games-playing with “option income” or other crap. So we can estimate sustainable income going forward as $4.838-million per six-month period … dependent, of course, on none of their underlying holdings cutting the dividend.

    Expenses were $1.189-million, which looks sustainable. Distributions on preferred shares were $2.980-million.

    Thus, income coverage is 4.838/(1.189 + 2.980) = 1.16:1. This is a good number. They can cover their expenses and preferred share distribution with sustainable income (assuming no cuts in dividend receipts), which is a Good Thing and not the case for all split-shares (see Split Shares and the Credit Crunch).

    There is a major drag on NAV of the Capital Unit distribution, which amounted to $6.818-million in the financial statements. Given that there were 11.363-million units outstanding, this amounts to a drag on NAV of $0.60 per unit per half, or $1.20 per year – which ties in admirably with the “8.0% targeted yield based on $15.00 issue price, paid monthly”. However, this drag has been eliminated due to:

    No distributions will be paid on
    Class A shares if (i) distributions payable on the Preferred shares are in arrears or (ii) after the payment of the distributions by the Fund,
    the Published NAV per unit is less than $15.


    So income and asset coverage both look reasonable especially when compared to the market price rather than to the obligation of $10. But to me, it doesn’t look good enough to warrant a Pfd-2/Pfd-2(low) rating and I expect a cut to maybe Pfd-3 / Pfd-3(high).

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