DBRS Limited (DBRS) assigned a provisional rating of Pfd-2 (low) to the Class AA Preferred Shares, Series 9 (the Series 9 Preferred Shares) to be issued by Partners Value Split Corp. (the Company) that will rank pari passu with the existing Class AA Preferred Shares, Series 3 (the Series 3 Preferred Shares); the Class AA Preferred Shares, Series 6 (the Series 6 Preferred Shares); the Class AA Preferred Shares, Series 7 (the Series 7 Preferred Shares); and the Class AA Preferred Shares, Series 8 (the Series 8 Preferred Shares; collectively, the Class AA Preferred Shares).
Proceeds from the Series 9 Preferred Share offering will be used to fund the redemption of the Series 3 Preferred Shares no later than their scheduled maturity date of January 10, 2019. The Series 9 Preferred Shares will be entitled to fixed quarterly cumulative preferential dividends on the expected issue price of $25.00. The maturity date for the Series 9 Preferred Shares is set to February 28, 2026.
The Company owns a portfolio (the Portfolio) of Class A Limited Voting Shares (the BAM Shares) of Brookfield Asset Management Inc. (BAM; rated A (low) with a Stable trend by DBRS). Dividends received 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. There were 700 Debentures issued on November 9, 2018, as a result of the retraction of 700 Series 8 Preferred Shares.
Holders of the Junior Preferred Shares, Series 1 (the Junior Preferred Shares) are entitled to receive quarterly noncumulative cash distributions at an annual rate of 5% when declared by the board of directors. There is $200 million worth of Junior Preferred Shares currently outstanding. Holders of the Capital Shares of the Company will only receive excess dividend income 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 BAM Shares will benefit the holders of the Capital Shares. All series of Class AA Preferred Shares rank senior to the Capital Shares, the Class AAA Preferred Shares and the Junior Preferred Shares and on a pari passu basis with all other Class AA Preferred Shares with respect to payment of dividends and repayment of principal.
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 dissolution, winding up or insolvency of the Company. As of June 30, 2018, there were $100 worth of such shares outstanding.
Following the redemption of the Series 3 Preferred Shares, the downside protection available to the Class AA Preferred Shares is expected to be approximately 85% (based on the closing price of BAM shares as of October 29, 2018) and the dividend coverage ratio is expected to be approximately 2.0 times (x; based on the Canadian dollar and U.S. dollar exchange rate as of October 29, 2018). BAM declares its dividends in U.S. dollars; consequently, there is the 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 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 in the event that the borrower defaults on its obligations to return the borrowed securities.
The main constraints to the ratings are the following:
(1) The downside protection available to holders of the Class AA Preferred Shares depends solely on the market value of the BAM Shares held in the Portfolio, which will fluctuate over time.
(2) There is a lack of diversification, as the Portfolio is entirely made up of BAM Shares.
(3) Changes in the dividend policy of BAM may result in reductions in Class AA Preferred Shares dividend coverage.
(4) As BAM declares dividends in U.S. dollars, the Company is exposed to foreign currency risk relating to the Canadian-U.S. exchange rate, specifically the appreciation of the Canadian dollar versus the U.S. dollar. This may have a negative impact on the dividend coverage ratio of the Class AA Preferred Shares, as these dividends are paid in Canadian dollars.
(5) Downside protection available to the Class AA Preferred Shares may be negatively affected by the retraction of the Junior Preferred Shares.
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is Rating Canadian Split Share Companies and Trusts, which can be found on dbrs.com under Methodologies.
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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