DBRS Rates 5Banc Split Inc. Class C Preferred Shares, Series 1 Pfd-2 (low)

DBRS has today assigned a rating of Pfd-2 (low) to the Class C Preferred Shares, Series 1 (the Preferred Shares), issued by 5Banc Split Inc. (the Company) and discontinued the rating on the Class B Preferred Shares, which have been repaid. On October 7, 2011, the Company announced the approval of a share capital reorganization proposal (the Reorganization), which allows holders of the Company’s Class B Capital Shares (the Capital Shares) to extend the term of their investments five years beyond the original December 15, 2011, redemption date. The Class B Preferred Shares were redeemed on December 15, 2011, as originally outlined in the November 28, 2006, prospectus, and a new series of approximately 2.58 million Class C Preferred Shares have been issued in order to attain the desired leveraged split share structure of the Company.

The net proceeds from the offering were used toward funding the redemption of the Class B Preferred Shares and retraction of the Class B Capital Shares under the Special Retraction Right for those holders who did not want to extend their investment in the Company. The Company holds a portfolio of common shares of the top five Canadian chartered banks (the Portfolio): Canadian Imperial Bank of Commerce, Bank of Montreal, Bank of Nova Scotia, Royal Bank of Canada and The Toronto-Dominion Bank. After accounting for the Reorganization, the Portfolio is initially rebalanced to an equal weight position among the five banks and is not actively traded.

Dividends received from the Portfolio will be used to pay a quarterly fixed, cumulative, preferential distribution of $0.11875 per Preferred Share to yield 4.75% per annum. Based on the current dividend yields on the underlying banks, initial Preferred Share dividend coverage is approximately 1.90 times. As a result, the Preferred Share distributions will initially be funded entirely from dividends received on the Portfolio. Holders of the Class B Capital Shares are expected to receive all excess dividend income after the Class C Preferred Share distributions and other expenses of the Company have been paid. The initial downside protection available to holders of the Class C Preferred Shares is approximately 56.6%.

The Pfd-2 (low) rating of the Class C Preferred Shares is based primarily on the downside protection and dividend coverage available, as well as on the strong credit quality and consistency of dividend distributions of the Portfolio holdings.

The main constraints to the rating are the following:

(1) The downside protection provided to holders of the Preferred Shares is dependent on the value of the shares in the Portfolio.
(2) Volatility of price and changes in the dividend policies of the Canadian banks may result in significant reductions in downside protection from time to time.
(3) The concentration of the entire Portfolio in the Canadian financial services industry.

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.