DBRS Rates BAM Split Corp. Class AA Preferred Shares, Series 5 Pfd-2 (low)

DBRS has today assigned a rating of Pfd-2 (low) to the Class AA Preferred Shares, Series 5 (the Series 5 Preferred Shares) issued by BAM Split Corp. (the Company). The Series 5 Preferred Shares have a fixed coupon of 4.85% and a final maturity date of December 10, 2017 (the Final Maturity). In addition, the ratings for the previously issued and publicly rated Class AA Preferred Shares, Series 1 (the Series 1 Preferred Shares), Class AA Preferred Shares, Series 3 (the Series 3 Preferred Shares) and Class AA Preferred Shares, Series 4 (the Series 4 Preferred Shares) have been confirmed at Pfd-2 (low). The Series 1 Preferred Shares, Series 3 Preferred Shares, Series 4 Preferred Shares and Series 5 Preferred Shares are collectively referred to as the Class AA Preferred Shares.

The Company has issued five million Series 5 Preferred Shares at $25 each (for gross proceeds of $125 million) to pay a special dividend to the holders of the capital shares issued by the Company (the Capital Shares).

The Company owns a portfolio (the Portfolio) of Class A Limited Voting Shares (the BAM Shares) of Brookfield Asset Management Inc. (BAM). Dividends received from the Portfolio will be used to fund the payment of dividends on the various series of Class AA Preferred Shares. Any capital appreciation of the BAM Shares will benefit the holders of the Capital Shares. All series of Class AA Preferred Shares rank senior to the Capital Shares and pari passu with all other Class AA Preferred Shares with respect to payment of dividends and repayment of principal. The Capital Shares of the Company are expected to receive all excess dividend income after Class AA Preferred Shares distributions and other Company expenses have been paid.

Prior to the issuance of the Series 5 Preferred Shares, there was approximately 78% of downside protection available to the Class AA Preferred Shares. Following the new issuance, the downside protection available to the Class AA Preferred Shares will be approximately 70%, based on the market value of the BAM Shares as of December 9, 2010. The dividend coverage ratio will be approximately 1.1 times. As a result, the Company will initially be able to fund the Class AA Preferred Shares distributions without relying on other methods for generating income or reverting to the sale of common shares in the Portfolio. In the event of a shortfall, the Company will sell some of the BAM Shares or write covered call options in order to generate sufficient income to satisfy its obligations to pay the Class AA Preferred Shares dividends.

The rating assigned to the Series 5 Preferred Shares is an indication of the probability that the Company will make timely payments of dividends and ultimately repay principal by the Final Maturity. The Pfd-2 (low) ratings of the Class AA Preferred Shares are primarily based on the downside protection and dividend coverage available to the Class AA Preferred Shares.

The main constraints to the rating are the following:

(1) The downside protection available to holders of the Class AA Preferred Shares depends solely on the market value of the 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 the dividend policy of BAM may result in reductions in Class AA Preferred Shares dividend coverage.

(4) The BAM Shares pay dividends in U.S. dollars, so the Company is exposed to foreign currency risk relating to the Canadian-U.S. exchange rate, which may have a negative impact on the Class AA Preferred Shares dividend coverage ratio.

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

The applicable methodology is Rating Canadian Split Share Companies and Trusts, which can be found on our website under Methodologies.