DBRS Morningstar Confirms Brompton Split Banc Corp. Preferred Shares Rating at Pfd-3 (high)

DBRS Limited (DBRS Morningstar) confirmed the rating of the preferred shares (the Preferred Shares) issued by Brompton Split Banc Corp. (the Company) at Pfd-3 (high). The Company invests in a portfolio of common shares (the Portfolio) issued by the six major banks in Canada: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and The Toronto-Dominion Bank, and one exchange-traded fund (ETF), Brompton North American Financials Dividend ETF. Up to 10% of the Portfolio may be invested in global financial companies from time to time. The Portfolio portion allocated to the major banks remains approximately equally weighted.

Distributions on the Preferred Shares are made quarterly in the amount of $0.125, yielding 5.0% annually on the original $10.00 issue price. Distributions on the Class A Shares are made monthly in the amount of $0.10 per share. No monthly distributions to the Class A Shares will be made if distributions to the Preferred Shares are in arrears or the net asset value (NAV) of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions will be made if the NAV of the Company is below $25.00. The Company has the ability to write covered call options or covered put options with respect to all or part of the common shares of the Portfolio, which it currently actively engages into to generate additional income. In addition, the Company may enter into Securities Lending Agreements in order to generate an alternative source of income.

On February 13, 2020, the Company completed a treasury offering issuing Preferred Shares and Class A Shares for gross proceeds of approximately $52.8 million.

The termination date of the Company is November 29, 2022. The board of directors may extend the term of the Company and the shares by successive terms of up to five years, provided that shareholders are given an optional retraction right at the end of each successive term. On maturity, the holders of the Preferred Shares will be entitled to the value of the Company up to the face value 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.

Following the stock market sell-off in response to the world-wide spread of Coronavirus Disease (COVID-19) and various geopolitical news, Preferred Shares experienced a decline in downside protection. As of March 31, 2020, the downside protection available to the Preferred Shares was approximately 40.8%. The dividend coverage was 1.8x.
The confirmation of the rating of the Preferred Shares at Pfd-3 (high) is based on the downside protection available, the strong dividend coverage, and the minimum downside protection provided by the asset coverage test.

The main constraints to the rating are the following:

-- Market fluctuations resulting from the response to world-wide spread of coronavirus that could further affect the NAV of the Company. The downside protection available to holders of the Preferred Shares depends on the value of the common shares held in the Portfolio.

-- Changes in the dividend policies of the underlying issuers may result in significant reductions in interest coverage or downside protection from time to time.

-- Reliance on the manager to generate a high yield on the investment portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

-- The concentration of the Portfolio in one industry.

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.

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.

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 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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