DBRS Morningstar Confirms North American Financial 15 Split Corp. Preferred Shares at Pfd-4 (high)

DBRS Limited (DBRS Morningstar) confirmed the rating on the Preferred Shares issued by North American Financial 15 Split Corp. (the Company) at Pfd-4 (high). The Company holds a portfolio (the Portfolio) that consists of common shares of approximately 15 North American financial services companies: Bank of America Corporation; Bank of Montreal; The Bank of Nova Scotia; Canadian Imperial Bank of Commerce; CI Financial Corp.; Citigroup Inc.; The Goldman Sachs Group, Inc.; Great-West Lifeco Inc.; JPMorgan Chase & Co.; Manulife Financial Corporation; National Bank of Canada; Royal Bank of Canada; Sun Life Financial, Inc.; The Toronto-Dominion Bank; and Wells Fargo & Company. Up to 15% of the Company’s net asset value (NAV) may be invested in securities of issuers other than those mentioned above and no more than 10% of the Company’s NAV may be invested in any single issuer. Approximately 54.9% of the Portfolio was invested in U.S. dollars (USD) as of November 30, 2019. The Company may use derivatives for hedging purposes.

On September 19, 2019, in relation to the previously announced term extension, the Company announced that the minimum rate of coupon paid on the Preferred Shares was left unchanged. The new termination date is December 1, 2024.

Following the stock market sell-off in response to the worldwide spread of Coronavirus Disease (COVID-19) and various geopolitical news, Preferred Shares experienced a decline in downside protection. The Portfolio provides approximately 16.2% of downside protection as at March 31, 2020. The Preferred Shares currently pay a fixed cumulative monthly dividend of $0.04583 per Preferred Share, yielding 5.5% annually on their issue price of $10.00 per share. As a part of the Class A Share consolidation on December 13, 2019, monthly distributions to holders of the Class A Shares were increased to $0.11335 to maintain the same pre-consolidation rate of 8% per annum on their $15.00 issue price per share. No distributions will be paid to Class A Shares if the NAV per unit falls below $15.00 and no special year-end dividends will be paid if, after such payment, the Portfolio’s NAV is less than $25.00. Cash distributions on the Class A shares are suspended as of March 2020. The Preferred Share dividend coverage ratio was approximately 0.71 times. The average grind on the Portfolio is expected to be 1.7% annually in the next four years. To supplement dividend income received on the Portfolio, the Company may engage in option writing.

Based on the current amount of the downside protection and above-mentioned Portfolio metrics, the Preferred Shares rating was confirmed at Pfd-4 (high).

The main challenges are:

(1) Market fluctuations resulting from the response to worldwide spread of coronavirus that could further affect the NAV of the Company.
(2) The reliance on the Portfolio manager to generate additional income through methods such as option writing.
(3) The monthly cash distributions to holders of the Class A Shares, although currently suspended as the NAV per unit is below the $15.00 threshold.
(4) The unhedged portion of the USD-denominated Portfolio that exposes the Portfolio to foreign currency risk.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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@dbrsmorningstar.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.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577