DBRS Rates CANADIAN Financials & Utilities Split Corp.

DBRS has today assigned a new rating to the Preferred Shares issued by CANADIAN Financials & Utilities Split Corp. (the Company) at Pfd-1 with a Stable trend. The Company raised $40.25 million by issuing an equal number of Preferred Shares (at $10 each) and an equal amount of Class A shares (at $15 each) to provide 57% downside protection (after expenses) to the Preferred Shares. Net proceeds from the offering were used to invest in a diversified portfolio of common shares and units (the Portfolio) issued by real estate investment trusts (REITs), financial institutions (bank and non-bank) and utility issuers. The Portfolio will be passively managed by Connor, Clark & Lunn Capital Markets Inc. (the Manager).

Holders of the Preferred Shares will be entitled to receive fixed quarterly, cumulative distributions for an annual yield of 4.25%. The Company will also pay quarterly distributions to Class A shares in an amount equal to the excess dividends received on the Portfolio after the distribution payable on the Preferred Shares and expenses.

The rating of the Preferred Shares is based on the following:

(1) The available downside protection, which is 57% to the principal amount of the outstanding Preferred Shares at closing.

(2) The diversification of the Portfolio and the consistency of dividend payments of all the underlying companies in the Portfolio.

(3) The Interest Coverage Ratio test of 1.5 times for the Preferred Shares, which ensures a high level of protection to the holders of the Preferred Shares.

(4) The ability to de-leverage by selling securities in the Portfolio and investment in cash and cash equivalents to preserve capital for the Preferred Share holders.

Challenges include the following:

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

(2) There is heavy concentration in the banking industry and REITs.

(3) Volatility of price, changes in the dividend policies of the Portfolio and potential grind of capital under challenging market conditions may result in reductions in downside protection.

(4) There is reliance on the Manager and RBC Dominion Securities Inc. (the Leverage Agent) to balance and manage the leverage of the Company.

Such challenges, however, are mitigated by a dynamic de-leveraging mechanism, which is discussed further in the report.

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