DBRS Morningstar Finalizes Provisional Rating of Pfd-2 (low) on Partners Value Split Corp. Class AA Preferred Shares, Series 12

DBRS Limited (DBRS Morningstar) finalized its provisional rating of Pfd-2 (low) on the Class AA Preferred Shares, Series 12 (the Series 12 Preferred Shares) issued by Partners Value Split Corp. (the Company). DBRS Morningstar also confirmed the ratings on the Class AA Preferred Shares, Series 7 (the Series 7 Preferred Shares); Class AA Preferred Shares, Series 8 (the Series 8 Preferred Shares); Class AA Preferred Shares, Series 9 (the Series 9 Preferred Shares); Class AA Preferred Shares, Series 10 (the Series 10 Preferred Shares); and the Class AA Preferred Shares, Series 11 (the Series 11 Preferred Shares; collectively, the Class AA Preferred Shares) at Pfd-2 (low).

The Series 12 Preferred Shareholders will be entitled to receive a quarterly fixed cumulative dividend of $0.2750 per share to yield 4.4% per annum on the issue price of $25.00. The maturity date for the new series is February 29, 2028. The net proceeds from the Series 12 Preferred Share offering will be used to fund the redemption of the Company’s Series 7 Preferred Shares and to pay a special dividend on the Capital Shares (the Capital Shares).

The Company owns a portfolio (the Portfolio) of Brookfield Asset Management Inc. (BAM; rated A (low) with a Stable trend by DBRS Morningstar) Class A Limited Voting Shares (the BAM Shares). Dividends 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 are 700 Series 6 Debentures outstanding (as a result of the retraction of 700 Series 8 Preferred Shares) and 3,200 Series 7 Debentures (as a result of the retraction of 3,200 Series 9 Preferred Shares).

All series of Class AA Preferred Shares rank senior to the Capital Shares, the Class AAA Preferred Shares, and the Junior Preferred Shares, Series 1; the Junior Preferred Shares, Series 2; and the Junior Preferred Shares, Series 3 (collectively, the Junior Preferred Shares) and rank pari passu with all other Class AA Preferred Shares with respect to the payment of dividends and repayment of principal.

The Company redeemed all of its 7,990,000 Class AA Preferred Shares, Series 6 for cash at a redemption price of $25.34272 per share on March 31, 2021, which included accrued but unpaid dividends of $0.09272. In connection with funding such redemption, the Company issued 2,000,000 Junior Preferred Shares, Series 3 to Partners Value Investments LP.

The Junior Preferred Shareholders are entitled to receive quarterly noncumulative cash distributions at an annual rate of 5% when declared by the board of directors. There is $295 million worth of Junior Preferred Shares currently outstanding. The Company’s Capital Shareholders 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 Capital Shareholders.

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 Company’s dissolution, winding up, or insolvency. As of April 1, 2021, 100 of such shares were outstanding.

Following the issuance of the Series 12 Preferred Shares and the redemption of the Series 7 Preferred Shares, the downside protection available to the Class AA Preferred Shares is expected to be approximately 87.6%, and the dividend coverage ratio is expected to be approximately 2.2 times (x; based on the Canadian dollar and U.S. dollar exchange rate as of April 6, 2021). BAM declares its dividends in U.S. dollars; consequently, there is 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 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 if 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 Class AA Preferred Shareholders depends solely on the market value of 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 BAM’s dividend policy 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.

(6) Market fluctuations resulting from the response to the worldwide spread of the Coronavirus Disease (COVID-19) that could negatively affect the Company’s net asset value.

The rating includes additional analysis on the expected performance as a result of the global efforts to contain the coronavirus pandemic. 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 March 17, 2021. For details, see “Global Macroeconomic Scenarios: March 2021 Update” at https://www.dbrsmorningstar.com/research/375376.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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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