NBF.PR.A Downgraded to Pfd-4(low) by DBRS

DBRS has announced that it:

has today downgraded the Preferred Shares issued by NB Split Corp. (the Company) to Pfd-4 (low) from Pfd-2 (low), with a Stable trend. The rating has been removed from Under Review with Negative Implications, where it was placed on October 24, 2008.

In February and March of 2007, the Company raised gross proceeds of approximately $106 million by issuing 1.521 million Preferred Shares (at $32.72 each) and 3.043 million Capital Shares (at $18.45 each). The initial split share structure provided downside protection of 50% to the Preferred Shares (after expenses).

The net proceeds from the initial offering were invested in a portfolio of common shares (the NB Shares) of National Bank of Canada (National Bank). Dividends received from the NB Shares are used to pay a fixed, cumulative quarterly dividend to the holders of the Preferred Shares yielding 4.75% 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 NB Shares less administration fees and other Company expenses is sufficient to fully cover the cost of the Preferred Shares distributions.

The value of the NB Shares has declined significantly since inception. From February 22, 2007, to December 22, 2008, the net asset value (NAV) of the Company dropped from $67.20 to $31.06, a decline of about 54%. As a result, all of the downside protection available to the Preferred Shares at inception has been eroded. Based on the most recent NAV, holders of the Preferred Shares would experience a loss of approximately 5% of their initial issuance price if the NB Shares were liquidated and proceeds distributed. However, the credit quality of National Bank remains strong as DBRS confirmed its senior debt rating at AA (low) with a Stable trend on November 26, 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 dividend policies of National Bank may result in reductions in asset coverage or dividend coverage from time to time.

The redemption date for both classes of shares issued is February 15, 2012.

The NAV for NBF.PR.A is posted on its website, as $31.06 on December 22; the issue price of the preferreds was $32.72. The preferreds closed today at 25.50-27.99 (!) 43×1. Based on the NAV and the ask price of the capital shares of $2.19, the monthly retraction (with formula R=95%NAV – 2C – 0.40) was $24.73 and hence not supportive.

NBF.PR.A was mentioned on PrefBlog in conncection with the DBRS March Review (not resolved) and the DBRS October Review. NBF.PR.A is not tracked by HIMIPref™.

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