DBRS Morningstar Confirms Life & Banc Split Corp. Preferred Shares at Pfd-3

DBRS Limited (DBRS Morningstar) confirmed its rating on the Preferred Shares issued by Life & Banc Split Corp. (the Company) at Pfd-3. The Company invests in a portfolio of common shares (the Portfolio) issued by the six major banks in Canada (Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and The Toronto-Dominion Bank) and four Canadian life insurance companies (Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc., Manulife Financial Corporation and Sun Life Financial Inc.). The Portfolio is approximately equally weighted and rebalanced at least annually. On November 30, 2018, the Company’s share term was extended for an additional five years until October 30, 2023. The board of directors may extend the Company’s share term by successive terms of up to five years, provided that shareholders are given an optional retraction right at the end of each successive term.

Holders of the Preferred Shares are entitled to fixed cumulative quarterly dividends, offering a return of 5.45% per annum (p.a.) on the original issue price of $10.00 per share. Holders of Class A Shares receive monthly distributions targeted at $0.10 per share. As protection to the holders of the Preferred Shares, an asset coverage test does not permit the Company to make monthly distributions to the Class A Shares if the dividends of the Preferred Shares are in arrears or if the net asset value (NAV) of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. In addition, no special distributions can be made to the Class A Shares if, after such distribution, the NAV of the Portfolio is below $25.00.

The Company has the ability to write covered call options or engage in securities lending with respect to the common shares of the Portfolio to generate additional income to supplement dividend distributions. Securities lending exposes the Portfolio to the risk of loss if the borrower defaults on its obligations to return the borrowed securities and if the collateral is insufficient to reconstitute the portfolio of loaned securities.

In the past year, the Company completed two treasury offerings:
-- On December 3, 2018, an aggregate amount of $58.4 million in gross proceeds was raised from the Class A and Preferred Share issuance;
-- On April 4, 2019, an aggregate amount of $25.5 million in gross proceeds was raised.

As of September 23, 2019, the downside protection available to the Preferred Shares was 44.7% and the dividend coverage ratio was about 1.1x. Taking into consideration the credit quality and diversification of the Portfolio as well as the amount of downside protection available to the Preferred Shares, DBRS Morningstar has confirmed the rating on the Preferred Shares at Pfd-3.

The main constraints to the rating are (1) the Company’s dependence on the value and dividend policies of the securities in the Portfolio and (2) the reliance on the portfolio manager to generate a high yield on the Portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

Notes:
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 & Criteria.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada