DBRS Places Diversified Preferred Share Trust Under Review with Negative Implications

DBRS has today placed the stability rating of STA-2 (low) for the retractable units (the Units) issued by Diversified Preferred Share Trust (the Trust) Under Review with Negative Implications following the Trust’s announcement that unitholders had approved the restructuring of the Trust into an open-ended mutual fund. The restructuring is expected to close on May 24, 2013.

The Trust is currently passively managed by Sentry Investments (the Administrator) and invests in investment-grade preferred shares and preferred securities that are listed on the Toronto Stock Exchange and meet a specific set of requirements (please refer to the latest rating report for the Trust). The limited flexibility in investments is considered a positive rating factor by DBRS and is consistent with stability ratings in the STA-1 and STA-2 range.

On February 15, 2013, the board of trustees of the Trust proposed a restructuring of the Trust that involved, among other things, changing the investment objectives and restrictions of the Trust and the elimination of the administration fee paid by the trust to the Administrator until June 1, 2016. While the reduction in expenses from removing the administration fee benefits income stability, the looser investment restrictions would allow the Trust to invest in a much broader range of assets (including fixed-income securities, equity securities, securities of other mutual funds (including those managed by the Administrator), derivatives, leveraged and unlevered exchange-traded funds and private placements) and gives the Trust the ability to engage in repurchase transactions and short selling. Furthermore, the Trust may invest up to all of its assets in foreign securities and is not expected to hedge its foreign currency exposure initially.

This significant increase in investment flexibility gives the Administrator considerable amounts of discretion as to what the Trust may invest in and is viewed as an increased risk to the stability of the stated distribution to holders of the Units of the Trust. As a result, the Units are being placed Under Review with Negative Implications.

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 updated on August 13, 2012.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Stability Ratings for Structured Income Funds (August 2012), which can be found on our website under Methodologies.