DBRS Morningstar Downgrades Brompton Oil Split Corp. Preferred Shares to Pfd-5 (low)

DBRS Limited (DBRS Morningstar) downgraded the rating of the Preferred Shares issued by Brompton Oil Split Corp. (the Company) to Pfd-5 (low) from Pfd-5. As of March 5, 2020, the downside protection available to Preferred Shareholders was –18.3%. It has been gradually decreasing since the last review in December 2019 because of the depressed price of energy stocks as the oil market continues to suffer from lower demand and oversupply. Recent geopolitical developments, including negative impacts from the accelerated global spread of Coronavirus (COVID-19), have added further stress to stock prices.

On February 4, 2020, the Company announced a new term extension of three years on the Preferred Shares with the new maturity date of March 30, 2023. The distribution rate on the Preferred Shares increased to 6.5% per annum paid on the original price of $10.00. The targeted distributions to the Capital Shares remained unchanged at $1.20 per Capital Share per year, subject to a net asset value (NAV) test of 1.5 times (x). Because the NAV test is currently not being met, the Capital Share distributions have been suspended. The dividend coverage was 0x as the Portfolio is currently generating just enough income to cover expenses. Based on the value of the Company’s portfolio value as of March 5, 2020, the anticipated average grind is 8.62% per annum over the next three years.

On March 2, 2020, the Company announced that approximately 2.4 million Preferred Shares were tendered for a special retraction at the end of the current term (March 31, 2020). This amount will constitute approximately 75% of the currently outstanding Preferred Shares if they are not withdrawn from the retraction.

Considering the limited time remaining until maturity and the insufficient amount of downside protection, there is an increased likelihood that the original principal invested by Preferred Shareholders will not be fully repaid during the upcoming special retraction. As a result, DBRS Morningstar downgraded its rating of the Preferred Shares issued by the Company to Pfd-5 (low).

The Company invests in common shares of at least 15 large capitalization North American oil and gas issuers selected from the S&P 500 Index and the S&P/TSX Composite Index. The Company may also invest up to 25% of the Portfolio value in the common shares of issuers listed on the S&P 500 Index or the S&P/TSX Composite Index that satisfy its investment criteria (i.e., issuers that operate in energy subsectors including equipment, services, pipelines, transportation, and infrastructure). The Portfolio is approximately equally weighted, actively managed, and rebalanced at least semi-annually. A portion of the Portfolio’s investments are denominated in U.S. dollars; however, substantially all of this exposure is hedged back to Canadian dollars. The Company has the ability to write covered call options or engage in securities lending to generate additional income.

Notes:
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 principal methodology is Rating Canadian Split Share Companies and Trusts, which can be found on dbrs.com under Methodologies & Criteria.

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.

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