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

DBRS Limited (DBRS Morningstar) confirmed the rating on the Class B Preferred Shares, Series 2 (the Series 2 Preferred Shares) issued by Allbanc Split Corp. II (the Company) at Pfd-2. The Company holds a portfolio (the Portfolio) of publicly listed common shares of Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia, and The Toronto-Dominion Bank (collectively, the Portfolio Shares). The Company has confirmed that the final redemption date of the Series 2 Preferred Shares will be February 26, 2021, and that the Company will wind up and terminate as soon as practicable after such date.

The dividends received from the Portfolio are used to pay a fixed cumulative quarterly distribution of $0.3048 per share to holders of the Series 2 Preferred Shares, yielding 4.75% annually on the issue price of $25.67. The current yield on the Portfolio shares fully covers the Series 2 Preferred Share dividends, providing dividend coverage of approximately 2.1 times (x). The Class A Capital Shares receive excess dividend income after the Company’s Series 2 Preferred Share distributions and other expenses have been paid. To generate additional income, the Company may engage in securities lending and covered-call option writing.

Although downside protection had been depressed for the most part of the year, it bounced back toward the end of December 2020. It stood at 68.2% as of January 7, 2021, the level observed a year ago. Considering the amount of downside protection, dividend coverage above 1.0x, and strong Portfolio credit quality as well as time remaining until maturity, DBRS Morningstar confirmed the rating on the Series 2 Preferred Shares issued by the Company at Pfd-2.

The main constraints to the rating are the following:

(1) The downside protection provided to holders of the Series 2 Preferred Shares is dependent on the value of the Portfolio shares.

(2) The entire Portfolio is concentrated in the Canadian financial services industry.

CORONAVIRUS-RELATED ANALYTICAL CONSIDERATIONS
This rating action was based on factors that included additional analysis and, where appropriate, additional assumptions applied to expected performance as a result of the global efforts to contain the spread of the Coronavirus Disease (COVID-19). The DBRS Morningstar Sovereigns group initially published its outlook on the coronavirus’ impact on key economic indicators for the 2020–22 time frame on April 16, 2020. The scenarios were updated on December 2, 2020. For details, see “Global Macroeconomic Scenarios: December Update” at https://www.dbrsmorningstar.com/research/370672/global-macroeconomic-scenarios-december-update. For the confirmed ratings, DBRS Morningstar considered impacts consistent with the moderate scenario in the referenced commentary in its analysis.

ESG CONSIDERATIONS
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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