DBRS Morningstar Confirms Ratings of Canoe EIT Income Fund Cumulative Redeemable Series 1 and Series 2 Preferred Units at Pfd-2 (high)

DBRS Limited (DBRS Morningstar) confirmed the ratings of the Cumulative Redeemable Series 1 Preferred Units (the Series 1 Preferred Units) and the Cumulative Redeemable Series 2 Preferred Units (the Series 2 Preferred Units; collectively with the Series 1 Preferred Units, the Preferred Units) issued by Canoe EIT Income Fund (the Fund) at Pfd-2 (high). The Fund is a closed-end, actively managed investment trust focused on a broad range of income-producing investments in various industries, currencies, and geographic regions. As of December 31, 2019, the Fund’s portfolio (the Portfolio) was composed of approximately 43 securities. Some major industries the Fund invests in are financials (37.6%), energy (20.6%), materials (12.7%), and healthcare (10.8%). The Series 1 Preferred Units are retractable for cash at the option of the holder on or after March 15, 2024. The Series 2 Preferred Units are retractable for cash at the option of the holder on or after March 15, 2025.

The Preferred Unit holders receive quarterly cumulative preferential cash distributions of $0.30 (or $1.20 annually), representing a 4.80% annual return on the issue price of $25.00. The distributions are mainly funded through income received from the income-generating securities in the Portfolio. The distribution coverage ratio was approximately 0.7. The Fund may also engage in writing covered call options to supplement the income. To mitigate the currency exchange risk, the Fund may enter into foreign exchange contracts.

Following the stock market sell-off in response to the worldwide spread of Coronavirus Disease (COVID-19) and various geopolitical news, the Preferred Units experienced a decline in downside protection. As of April 6, 2020, the downside protection available to the Preferred Units was approximately 76%.

The holders of the Fund Units (the Units) currently receive targeted monthly cash distributions of $0.10, amounting to $1.20 per annum. In addition, up to 10% of the aggregate outstanding Units may be redeemed at the option of the Unit holders each calendar year on a date determined by the Fund. On January 2, 2020, approximately 0.48% of the outstanding Units were redeemed for cash as part of the regular annual redemption option.

On March 8, 2019, the Fund suspended the Premium Distribution component and Distribution Reinvestment component of its Premium Distribution, Distribution Reinvestment and Optional Cash Purchase Plan. The Fund continues to have the ability to issue additional Units through overnight or at-the-market (ATM Program) offerings. On February 22, 2019, the Fund issued 6.5 million of Units for gross proceeds of approximately $73.5 million. On May 23, 2019, the Fund issued additionally 6.9 million of Units for gross proceeds of approximately $78.3 million. In July 2019, the Fund established an ATM Program that allows the Fund to issue up to $129 million of Units. The ATM Program will be effective until November 25, 2020, unless terminated prior to such date by the Fund. During 2019, the ATM Program purchases were $8.1 million.

The Fund has a credit facility (the Credit Facility) with a Tier 1 Canadian bank, but it is restricted by its Declaration of Trust from borrowing in excess of 20% of the Fund’s total assets at the time of borrowing, after giving effect to the borrowing. The Credit Facility is secured by all of the Fund’s present and after-acquired personal property, undertaking and assets as well as all proceeds thereof. Distributions on the Preferred Units are restricted if a default or event of default occurs under the Credit Facility or if the outstanding amount borrowed exceeds the available credit at any time.

Based on the level of downside protection, the distribution coverage ratio and diversification of the Portfolio, DBRS Morningstar confirmed the rating of Pfd-2 (high) on the Preferred Units issued by the Fund.

The main constraints to the rating are the following:

-- The potential grind on the Portfolio arising from redemption rights and distributions to the Units.
-- The foreign-exchange risk as a result of the absence of a hedge on some investments in foreign currencies.
-- The priority of the lenders under the Credit Facility over the Fund’s assets up to the amount of credit outstanding.
-- Market fluctuations resulting from the response to worldwide spread of coronavirus that could further affect the net asset value of the Company.

COVID-19 Analytical Considerations

Global macroeconomic forecasts have shifted dramatically amid the rapid spread of the Coronavirus Disease (COVID-19) and associated responses from governments, corporations, and households. In the context of this highly uncertain environment, DBRS Morningstar released a commentary on global macroeconomic scenarios and their implications for credit ratings, which can be found at: https://www.dbrsmorningstar.com/research/359679

Under the Moderate Scenario, DBRS Morningstar expects a significant economic contraction in Canada and the United States in 2020, that will be followed by a recovery in subsequent years. DBRS Morningstar analyzed the sensitivity of the current rating on the Preferred Units to the impact of this scenario on the levels of downside protection and dividend coverage. Although a significant negative impact is expected in the short-term, given consideration to the remaining term to maturity, the Fund is expected to have enough time to benefit from a stock market rebound as the economies recover.

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 (June 25, 2019), 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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