DBRS Downgrades High Income Preferred Series 1 Shares to Pfd-2 (low) and Series 2 Shares to Pfd-4

DBRS has today downgraded two series of Preferred Shares issued by High Income Preferred Shares Corporation (the Company). The Series 1 Shares have been downgraded from Pfd-2 to Pfd-2 (low) and the Series 2 Shares have been downgraded from Pfd-3 to Pfd-4. Both series of shares maintain a Negative trend.

At inception, the Company issued 1.26 million Series 1 Shares at $25 per share, 1.26 million Series 2 Shares at $14.70 per share and privately placed 1.26 million Equity Shares at $3.54 per share. The termination date for each series of shares is June 29, 2012 (the Redemption Date).

Approximately 33% of the gross proceeds from the initial offering were used to enter into a forward agreement with the Canadian Imperial Bank of Commerce (the Counterparty) to provide for the full repayment of the Series 1 Shares principal on the Redemption Date. The remaining net proceeds from the initial offering were invested in a portfolio of common shares (the Managed Portfolio), which initially provided asset coverage to the Series 2 Shares of about 1.8 (downside protection of 44%). In addition to providing coverage to the Series 2 Shares principal, the Managed Portfolio is used to pay annual fees and expenses, as well as monthly distributions to the Series 1 and Series 2 Shares (5.85% and 7.25% per annum, respectively).

Since inception, the Managed Portfolio’s net asset value (NAV) has declined 39% from about $27 to $16.36 per share (as of January 11, 2008), providing downside protection of 10% to the Series 2 Shareholders. Using a covered call option approach, the Managed Portfolio’s NAV has suffered in recent months due to high volatility in equity markets.

It is the Company’s intention to suspend both Series 1 and Series 2 dividend payments if the Managed Portfolio’s NAV drops below $14.70 per share. On the Redemption Date, the holders of the Series 1 and Series 2 Shares will be entitled to receive all cumulative dividends in arrears before the principal repayment to the Series 2 Shareholders. As a result, the ultimate payment of cumulative dividends to the Series 1 and Series 2 Shareholders is likely, but the timing of those payments is uncertain.

The downgrade of the Series 1 Shares is based on the risk that not all Series 1 dividends will be repaid, based on the NAV coverage over the remaining dividends. The full Series 1 principal is guaranteed, subject to the Counterparty meeting its obligations as part of the Series 1 Forward Agreement.

The downgrade of the Series 2 Shares is based on the eroding asset coverage available to cover the repayment of the Series 2 principal.

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