PrefBlog

DBRS Limited has announced that it:

upgraded its credit ratings on the Class AA Preferred Shares, Series 8; the Class AA Preferred Shares, Series 9; the Class AA Preferred Shares, Series 10; the Class AA Preferred Shares, Series 11; the Class AA Preferred Shares, Series 12; and the Class AA Preferred Shares, Series 13 (collectively, the Class AA Preferred Shares) issued by Partners Value Split Corp. (the Company) to Pfd-2 from Pfd-2 (low).

Previously, the Company’s portfolio (the Portfolio) consisted entirely of the Class A Limited Voting Shares of Brookfield Asset Management Inc. (Brookfield). However, in November 2022, Brookfield and Brookfield Asset Management Limited (BAM or the Manager) made an announcement regarding the public listing of the Manager and distribution of a 25% interest in Brookfield’s asset management business through the Manager. This transaction became effective on December 9, 2022, and resulted in the division of Brookfield into two publicly traded companies: (1) Brookfield Corporation (BN; Issuer Rating and Senior Notes and Debentures rated “A” and Preferred Shares rated Pfd-2 with Stable trends by Morningstar DBRS), which was previously named Brookfield Asset Management Inc.; and (2) Brookfield Asset Management Limited. As a result of this spinoff, Partners Value Split Corp. now holds shares of BN and BAM.

All series of Class AA Preferred Shares rank senior to the Capital Shares, the Class AAA Preferred Shares, and the Junior Preferred Shares, Series 1; the Junior Preferred Shares, Series 2; and the Junior Preferred Shares, Series 3 (collectively, the Junior Preferred Shares) and rank pari passu with all other Class AA Preferred Shares with respect to the payment of dividends and repayment of principal. Dividends from the Portfolio are used to fund the payment of interest on the debentures to the extent that any have been issued and to fund the payment of dividends on the Class AA Preferred Shares. Currently, there are no outstanding debentures in the Company.

Preferred shareholders of Class AA Preferred Shares are entitled to receive fixed cumulative dividends with a yield of 4.80%, 4.90%, 4.70%, 4.75%, 4.40%, and 4.45% on the issue price of $25 (listed in sequential order from Series 8 to Series 13). The Junior Preferred Shareholders are entitled to receive quarterly noncumulative cash distributions at an annual rate of 5% when declared by the board of directors. There is $295 million worth of Junior Preferred Shares currently outstanding. The Company’s Capital Shareholders will receive excess dividend income only after interest on the debentures, Class AA Preferred Share distributions, Junior Preferred Share distributions, and other Company expenses have been paid. Any capital appreciation of the BN and BAM shares will benefit the Capital Shareholders.

The Company has issued a limited number of Class A Voting Shares that rank senior to the Class AA Preferred Shares in respect of capital upon the Company’s dissolution, winding up, or insolvency. There are currently 100 of such shares outstanding with a book value of USD 8.00 each.

As of February 27, 2024, the asset coverage, downside protection, and dividend coverage stood at 8.9 times (x), 88.8%, and 2.8x, respectively. Because of the excess-only nature of both Junior Preferred Share and Capital Share dividends, there is no grind on the Portfolio. The Company receives dividends in U.S. dollars; consequently, there is risk that an appreciating Canadian dollar will cause the dividend coverage ratio to fall below 1.0x. In the event of a shortfall, the Company may sell some of the BN or BAM shares, engage in security lending, or write covered call options to generate sufficient income to satisfy its obligations to pay the Class AA Preferred Shares dividends. If the Company chooses to lend its holdings, the Portfolio would be exposed to the potential losses if the borrower defaults on its obligations to return the borrowed securities.

Given that the Company’s portfolio holds BN and BAM only and BN further owns 75% of BAM, the credit rating on the Company’s Class AA Preferred Shares is driven by the credit ratings on BN’s Preferred Shares. Because of the recent upgrade of the credit rating on BN’s Preferred Shares to Pfd-2 from Pfd-2 (low) in November 2023 and the Company’s stable performance in 2023, Morningstar DBRS upgraded the credit rating on the Company’s Class AA Preferred Shares to Pfd-2 from Pfd-2 (low).

The main constraints to the credit ratings are the following:

(1) The downside protection available to the Class AA Preferred Shareholders depends solely on the market value of BN and BAM shares held in the Portfolio, which could fluctuate over time.

(2) There is a lack of diversification, as the Portfolio is entirely made up of BN and BAM shares.

(3) Changes in BN and BAM’s dividend policies may result in reductions in Class AA Preferred Shares dividend coverage.

(4) Downside protection available to the Class AA Preferred Shares may be negatively affected by the retraction of the Junior Preferred Shares.

Affected issues are PVS.PR.F, PVS.PR.G, PVS.PR.H, PVS.PR.I, PVS.PR.J and PVS.PR.K.

This entry was posted on Friday, March 8th, 2024 at 9:13 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.