DBRS Downgrades US Financial 15 Split Corp. Preferred Shares to Pfd-5 with a Negative Trend

DBRS has today downgraded the Preferred Shares issued by US Financial 15 Split Corp. (the Company) to Pfd-5 from Pfd-3, with a Negative trend.

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 generally represents between 4% and 8% of the net asset value (NAV) of the Company. In addition, up to 20% of the NAV may be invested in equity securities of issuers other than the Portfolio Companies. The Portfolio is managed by Quadravest Capital Management Inc. (the Manager).

Lehman Brothers Holdings Inc. (Lehman) and Washington Mutual, Inc. (WaMu) were two of the Portfolio’s core holdings; both companies filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code in September 2008. On September 22, 2008, the Manager announced that it was adding PNC Bank, Inc. as one of the core holdings, replacing Lehman. A replacement for WaMu has not yet been announced. Also, American International Group, Inc. and Wachovia Corporation are two of the Portfolio’s core holdings. Both companies have suffered declines of nearly 90% in common share value in September 2008.

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 distributions if the NAV of the Portfolio is less than $15 per share. No Class A distributions have been paid since May 31, 2008. Although Class A distributions are currently suspended, the Portfolio still requires an annual return of more than 2% from sources other than dividend income to maintain a stable NAV.

The initial split-share structure provided downside protection of 58% to the Preferred Shareholders (after expenses). The NAV has experienced significant declines due to the Portfolio’s concentration in the financial industry. As of September 15, 2008, the NAV of the Company was $10.33, declining about 50% over the past year. As a result, the downside protection available to the Preferred Shareholders is approximately 3%. The decrease in the capital protection available has resulted in a downgrade of the rating of the Preferred Shares. The revised rating is based on the downside protection available to holders of the Preferred Shares (3%) and 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 US financials industry.

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

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

The trend is Negative due to the additional return required in order to maintain a stable NAV.

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

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