DBRS Downgrades US Financial 15 Split Corp. Preferred Shares to Pfd-3

DBRS has today downgraded the Preferred Shares issued by US Financial 15 Split Corp. (the Company) to Pfd-3 from Pfd-2 with a Stable trend. The rating had been placed Under Review with Developing Implications on March 19, 2008.

The net proceeds from the initial offering were invested in a portfolio of common shares (the Portfolio) issued by 15 U.S. financial services companies (the Portfolio Companies). Each of the Portfolio Companies will generally represent between 4% and 8% of the net asset value (NAV) of the Company. In addition, up to 20% of the NAV of the Portfolio may be invested in equity securities of issuers other than the Portfolio Companies. The Portfolio is actively managed by Quadravest Capital Management Inc. (the Manager).

Holders of the Preferred Shares receive fixed cumulative monthly dividends yielding 5.25% per annum on the original issue price. The Company aims to provide holders of the Class A Shares with regular monthly distributions of $0.10 per Class A Share to yield 8.0% per annum on the original issue price. There is a NAV test that prevents the Manager from paying out Class A Shares distributions if the NAV of the Portfolio is less than $15 per share.

The initial split share structure provided downside protection of 58% to the Preferred Shareholders (after expenses). Although the credit quality of the Portfolio is strong, the NAV of the Portfolio has experienced downward pressure due to its concentration in the financial industry. In the last year, the NAV has dropped from $24.14 per share to $14.19 (as of April 15, 2008), a decline of about 41%. As a result, the current downside protection available to the Preferred Shareholders is approximately 30%.

The rating is based on the following:

(1) The current downside protection available (30% as of April 15, 2008).

(2) Historical consistency of dividend distributions of the Portfolio’s underlying companies.

(3) The asset coverage test limiting distributions to the Class A Shares.

The main challenges to the rating are the following:

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

(2) The volatility of price and changes in the dividend policies of the Portfolio Companies and potential erosion of the Portfolio under challenging market conditions may result in significant reductions in downside protection from time to time.

(3) The Portfolio is entirely concentrated in the U.S. financial services industry.

(4) There is a reliance on the Manager to generate income from option writing.

(5) There is a risk of fluctuation in the NAV of the Portfolio due to unhedged U.S. currency exposure.

The redemption date for both classes of shares issued is December 1, 2012.

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