DBRS snips Brompton Oil preferreds

DBRS said it downgraded the rating of the preferred shares issued by Brompton Oil Split Corp. 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 selected from the S&P 500 Index and the S&P/TSX Composite Index. Brompton 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.

Dividends are used to pay a fixed cumulative quarterly distribution to holders of the preferred shares of C$0.1250 per preferred share (C$0.50 per annum or 5.0% per annum on the initial issue price of C$10 per preferred share). The dividend coverage ratio was about 0.3 times as of Dec.11. Capital shares holders (the class A shares) may receive a regular monthly non-cumulative cash distribution of C$0.10 per class A share (C$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 of the company falls below C$15. 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, the agency said.

As of Dec. 11, 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 and weak dividend coverage, which creates further grind on the portfolio, DBRS downgraded the rating on the preferred shares to Pfd-5.

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