DBRS Morningstar Downgrades Brompton Oil Split Corp. Preferred Shares to Pfd-5

DBRS Limited (DBRS Morningstar) downgraded the rating of the Preferred Shares issued by Brompton Oil Split Corp. (the Company) to Pfd-5 from Pfd-4 (low). The Company invests in common shares of at least 15 large capitalization North American oil and gas issuers (the Portfolio) selected from the S&P 500 Index and the S&P/TSX Composite Index. The Company may also invest up to 25% of the Portfolio value in the common shares of issuers listed on the S&P 500 Index or the S&P/TSX Composite Index that satisfy its investment criteria, operating in energy subsectors including equipment, services, pipelines, transportation, and infrastructure. The Portfolio is approximately equally weighted, actively managed, and rebalanced at least semi-annually. A portion of the Portfolio’s investments are denominated in U.S. dollars; however, substantially all of this exposure is hedged back to Canadian dollars. The Company has the ability to write covered call options or engage in securities lending in order to generate additional income.

Dividends received on the Portfolio are used to pay a fixed cumulative quarterly distribution to holders of the Preferred Shares of $0.1250 per Preferred Share ($0.50 per annum or 5.0% per annum on the initial issue price of $10.00 per Preferred Share). The dividend coverage ratio was approximately 0.3 times as of December 11, 2019. Holders of the Capital Shares (the Class A Shares) may receive a regular monthly non-cumulative cash distribution of $0.10 per Class A Share ($1.20 per annum), subject to the asset coverage test, which does not permit any distributions to holders of the Class A Shares if the net asset value (NAV) of the Company falls below $15.00. Distributions to the Class A Shares are currently suspended because of a decline in the Portfolio’s NAV and the asset coverage test not being met.

As of December 11, 2019, the downside protection available to holders of the Preferred Shares was 0.6%. It has averaged around this level in the last three months as a result of depressed prices of energy stocks and the oil market struggling to recover from lower demand and oversupply. Subsequently, because of the downside protection reduction below acceptable levels for a prolonged period of time and weak dividend coverage, which creates further grind on the Portfolio, DBRS Morningstar downgraded the rating on the Preferred Shares to Pfd-5.

The maturity date of the Preferred Shares is March 31, 2020. On March 9, 2019, the Company announced an extension of the term for another three to five years. The details of the term extension will be announced at least 60 days before the maturity date.

The main constraints to the rating are the following:

(1) The downside protection available to holders of the Preferred Shares depends on the value of the common shares held in the Portfolio.

(2) Volatility of price and changes in the dividend policies of the underlying issuers may result in significant reductions in interest coverage or downside protection from time to time.

(3) Reliance on the manager to generate a high yield on the Portfolio to meet distributions and other Company expenses without having to liquidate portfolio securities.

(4) The concentration of the Portfolio in one industry

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

The principal methodology is Rating Canadian Split Share Companies and Trusts, which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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