ES.PR.B Downgraded to Pfd-4(low) by DBRS

DBRS has announced that it:

today downgraded the Class B, Preferred Shares (the Preferred Shares) issued by Energy Split Corporation (the Company) to Pfd-4 (low) from Pfd-3 (high). The rating remains Under Review with Negative Implications, where it was placed on October 24, 2008.

Investors in the Company’s Preferred Shares and Capital Shares gain exposure to a portfolio of selected oil and gas royalty trusts (the Portfolio) through a forward purchase and sale agreement (the Forward Agreement) with the Bank of Nova Scotia (the Counterparty). The Counterparty pays the Corporation the economic return provided by the Portfolio, which is held by an underlying fund (the Royalty Fund). In return, a portfolio of common shares of Canadian public companies acquired from proceeds of the Company’s initial offering is pledged to the Counterparty. The Forward Agreement is structured to provide tax-efficient distributions to the Company’s shareholders based on the performance of the Portfolio.

The holders of the Preferred Shares receive fixed preferred tax-efficient quarterly distributions yielding 4.5% per annum. The holders of the Capital Shares are entitled to leveraged tax-efficient distributions that are in excess of distributions paid to the Preferred Shares and all operating expenses of the Corporation.

The NAV of the Company has declined significantly in the last six months, dropping from $39.56 per share to $20.93, a decline of 47%. As a result, all of the downside protection available to the Preferred Shares has been eroded. Based on the most recent NAV, holders of the Preferred Shares would experience a loss of approximately 0.3% of their initial issuance price if the Forward Agreement were terminated and proceeds distributed. The Company’s dividend policy has been to pay quarterly distributions to the Capital Shares equal to the excess income available from the quarter after paying Preferred Shares dividends and other Company expenses. Due to the large amount of excess income available to the Company, the current policy allows for a very high level of payouts ($0.75 per Capital Share for each of the last two quarters) compared to what would be expected based on the current level of asset coverage available to the Preferred Shares. As a result, the Preferred Shares rating remains Under Review with Negative Implications.

As a result of the significant decline in asset coverage, DBRS has downgraded the rating of the Preferred Shares to Pfd-4 (low). A main constraint to the rating is that volatility of the market price and changes in distribution policies of the oil and gas trusts in the Portfolio may result in reductions in asset coverage or dividend coverage from time to time.

ES.PR.B is not tracked by HIMIPref™. It was last mentioned on PrefBlog when the DBRS Mass Downgrade of Feb 13 left the issue under review and unresolved.

One Response to “ES.PR.B Downgraded to Pfd-4(low) by DBRS”

  1. […] last mention of ES.PR.B was when it was downgraded to Pfd-4(low) by DBRS. ES.PR.B is not tracked by […]

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