DBRS Rates Manulife Innovative Tier 1 Issue at A (high), Stable Trend

DBRS has today rated the $1 billion issue of Manulife Financial Capital Trust II Notes – Series 1 (MaCSTM II) at A (high) with a Stable trend, as indicated in the Short Form Prospectus.

The A (high) rating is consistent with the existing rating assigned to the earlier MaCSTM issued on December 10, 2001. While the two issues are structured differently – MaCSTM representing units in its respective trust and MaCSTM II representing notes issued by its trust – the result is effectively the same for both – the tax-efficient issue of Tier 1 capital by The Manufacturers Life Insurance Company (MLI). MaCSTM II is expected to provide MLI with Tier 1 regulatory capital treatment by virtue of its convertibility into MLI preferred shares under certain stress events.

In both cases, the respective trusts use the proceeds to purchase a senior unsecured debenture from MLI, the income from which is used to meet the current debt service requirements of MaCSTM and MaCSTM II. Should MLI not make payment on its debenture, investors in the hybrid issues will see their investments converted into preferred shares of MLI. Correspondingly, under stress, the ratings of MaCSTM and MaCSTM II should be consistent with the rating of MLI’s preferred shares (Pfd-1). Following the notching methodology employed by DBRS, the MaCSTM and MaCSTM II issues therefore receive ratings which are two notches below the senior most rating of MLI (AA, with a Stable trend) and one notch below the corresponding subordinated debt rating (AA (low), with a Stable trend).

An amount equal to the proceeds received by MLI from MaCSTM II in exchange for its new debenture are expected to be loaned to Manulife Financial Corporation (MFC) to be invested in a portfolio of liquid investments pending a return to more stable capital market conditions. Longer term, DBRS expects that an amount equal to the proceeds of MaCSTM II will be used to retire the $1 billion balance presently outstanding under a credit facility with several major Canadian chartered banks. The new issue will not initially result in a net increase in the regulatory capital of MLI. Similarly, until the investment portfolio is liquidated in order to pay off the bank credit facility, DBRS does not consider the new issue to represent an increase in financial leverage.

DBRS observes that MFC has taken active advantage of strong investor appetite for the capital securities of Canadian financial institutions in recent months, and in the process has effectively defeased its obligations pursuant to the original $3 billion issue of bank debt taken on to address its weakened regulatory capital following the collapse of global equity markets in late 2008. This issuance activity is a testament to the financial flexibility enjoyed by MFC.

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

The applicable methodology is Rating Canadian Life Insurance, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.