DBRS Confirms Diversified Preferred Share Trust at STA-3 (high)

DBRS has today confirmed the stability rating of STA-3 (high) on the retractable units (the Units) issued by Diversified Preferred Share Trust (the Trust).

Proceeds from the Trust’s offerings have been used to invest in a diversified portfolio (the Portfolio) of preferred shares and securities. The Portfolio is passively managed by Sentry Investment Inc. (the Administrator).

On August 26, 2010, DBRS assigned a stability rating of STA-3 (high) to the Units issued by the Trust in accordance with the new methodology for rating structured income funds published in May 2010. The rating was mainly based on the strong credit quality of the Trust’s preferred share portfolio and the limited flexibility of the Administrator to invest in riskier assets. The shortfall in portfolio income relative to the distribution paid out to the Trust’s unitholders is the main constraint to the rating. Other constraints to the rating include the interest rate risk of the Portfolio and the capital losses that may result from underlying securities being called for redemption by their respective issuers.

The current weighted average yield of the Portfolio is approximately 4.95%. The Trust has been making quarterly distributions to the Unitholders equal to $0.30 per unit, yielding 4.80% per annum on the unit issue price of $25. The amount of the distribution and the net asset value (NAV) of the Portfolio may vary in accordance with the credit profile of each of the Portfolio’s underlying securities, prevailing interest rates and rate change expectations, and any losses or gains on rebalancing the Portfolio. On September 26, 2011, the Trust announced a change in the quarterly distribution rate from $0.30 per unit to $0.25 per unit, effective with the fourth-quarter distribution, payable on January 13, 2012, to unitholders of record on December 30, 2011. The change in the dividend amount will remain as such until further guidance is provided by the Trust. The Trust’s net income can currently cover approximately 77% of the distributions paid out to the unitholders. The reduction in the distribution rate will be of benefit to the shortfall in portfolio income relative to the distribution paid out to the Trust’s unitholder. The distribution coverage would increase from 77% to 92% if the new distribution rate is applied. The rating of STA-3 (high) is considered sufficient based on the change in distribution rate and other factors such as asset composition, credit quality and diversification of the Trust’s Portfolio, among others.

For more information on the rating factors considered by DBRS in its analysis, refer to the Stability Ratings for Structured Income Funds methodology that was published on May 11, 2010.

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

The applicable methodology is Stability Ratings for Structured Income Funds, which can be found on our website under Methodologies.