DBRS Morningstar Confirms BNS Split Corp. II Class B Preferred Shares, Series 2 at Pfd-2

DBRS Limited (DBRS Morningstar) confirmed the rating of the Class B Preferred Shares, Series 2 (the Preferred Shares) issued by BNS Split Corp. II (the Company) at Pfd-2. The Company holds a portfolio (the Portfolio) of common shares of the Bank of Nova Scotia. The dividends received from the Portfolio are used to pay fixed cumulative quarterly distributions to the holders of the Preferred Shares in the amount of $0.1971 per quarter, representing 4.0% per annum on the issue price. Excess dividends net of all expenses of the Company, after the preferred cumulative dividends have been paid to the holders of the Preferred Shares, may be paid as dividends on the Capital Shares or reinvested by the Company in additional BNS shares, as determined by the board of directors of the Company. The distributions of dividends on the Preferred Shares may be additionally funded from the sale of the underlying shares. The Company may engage in securities lending to supplement the income generated by the dividends.

On April 29, 2020, the Company announced that all of its issued and outstanding Capital Shares and Preferred Shares will be redeemed by the Company in accordance with their terms on September 22, 2020, and that the Company will wind up and terminate as soon as practicable after such date.

Following the stock market sell-off in response to the worldwide spread of Coronavirus Disease (COVID-19) and various geopolitical events in March 2020, the Preferred Shares experienced a decline in downside protection. As of July 30, 2020, the downside protection was 60.5%. The dividend coverage ratio was approximately 3.3 times. Taking into consideration the upcoming redemption, the amount of downside protection available, and the dividend coverage, DBRS Morningstar confirmed the rating of the Preferred Shares at Pfd-2.

The main constraints to the final rating are the following:

(1) The downside protection available to holders of the Preferred Shares depends on the value of common shares of BNS and is subject to share price volatility.

(2) Changes in dividend policy of BNS may result in fluctuations in dividend coverage or downside protection from time to time.

(3) The Portfolio is entirely concentrated in the common shares of BNS.

CORONAVIRUS-RELATED ANALYTICAL CONSIDERATIONS
Global macroeconomic forecasts have shifted dramatically amid the rapid spread of the coronavirus and associated responses from governments, corporations, and households. In the context of this highly uncertain environment, DBRS Morningstar initially published its outlook on the coronavirus’ impact on key economic indicators for the 2020–22 time frame in April 2020. DBRS Morningstar last updated the macroeconomic scenarios on July 22, 2020 in its “Global Macroeconomic Scenarios: July Update” at https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-update. For the confirmation of the rating on the Preferred Shares, DBRS Morningstar considered in its analysis the impact on the level of downside protection and dividend coverage consistent with the Moderate Scenario in the referenced commentary.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Split Share Companies and Trusts (June 23, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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@dbrsmorningstar.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.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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