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

DBRS Limited (DBRS Morningstar) confirmed the rating of the Preferred Shares issued by Financial 15 Split Corp. (the Company) at Pfd-4 (high). The Company invests in a portfolio (the Portfolio) consisting primarily of common shares of 15 high-quality 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. In addition, up to 15% of the net asset value (NAV) of the Company may be invested in securities of issuers other than those mentioned above. These issuers include Fifth Third Bancorp and AGF Management as of November 30, 2019. No more than 10% of the NAV of the Company may be invested in any single issuer. The Portfolio is actively managed by Quadravest Capital Management Inc.

A portion of the Company’s Portfolio is exposed to currency risk, as it includes securities and options denominated in U.S. dollars (USD), while the NAV of the Company is expressed in Canadian dollars. The Company has not entered into currency hedging contracts for the USD portion of the Portfolio, although the Company may use derivatives for hedging purposes. As of November 30, 2019, approximately 46.4% of the Portfolio was invested in USD-denominated assets.

Holders of the Preferred Shares are entitled to a fixed cumulative monthly dividend of $0.04583 per share, yielding 5.50% annually on their issue price of $10 per share. Holders of the Class A Shares (the Class A Shares) may receive regular monthly cash distributions in an amount to be determined by the Board of Directors. No regular monthly distributions will be paid to the Class A Shares if the NAV per unit is below the $15 threshold or if any dividends on the Preferred Shares are in arrears. Cash distributions on the Class A shares are suspended as of March 2020.

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. Downside protection available to holders of the Preferred Shares was approximately 13.3% as of March 31, 2020. The dividend coverage ratio was 0.79 times.

On March 2, 2020, the Company announced a term extension for additional five years. The new redemption date for both classes of shares is December 1, 2025. The minimum rate of cumulative monthly dividend paid on the Preferred Shares may be amended for the new term. The announcement will be made no later than September 30, 2020. At maturity, the holders of the Preferred Shares will be entitled to the value of the Company, up to the face amount of the Preferred Shares, in priority to the holders of the Class A Shares. Holders of the Class A Shares will receive the remaining value of the Company.

The confirmation of the rating on the Preferred Shares at Pfd-4 (high) is based on the amount of downside protection, its performance, and dividend coverage.

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 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.

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