DBRS Morningstar Confirms Rating of Dividend 15 Split Corp.’s Preferred Shares at Pfd-3

DBRS Limited (DBRS Morningstar) confirmed the rating of the Preferred Shares issued by Dividend 15 Split Corp. (the Company) at Pfd-3. The Company invests in a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio), which are issued by the following 15 core companies: Bank of Montreal, Bank of Nova Scotia, BCE Inc., CI Financial Corp., Canadian Imperial Bank of Commerce, Enbridge Inc., Manulife Financial Corporation, National Bank of Canada, Royal Bank of Canada, Sun Life Financial Inc., TELUS Corporation, Thomson Reuters Corporation, The Toronto-Dominion Bank, TransAlta Corporation, and TC Energy Corp. Up to 15% of the net asset value (NAV) of the Portfolio may be invested in equity securities of issuers other than the companies listed above. The Portfolio is actively managed by Quadravest Capital Management Inc. The Company has the ability to write covered call options in respect of some or all of the common shares held in the Portfolio to generate additional income and supplement the dividends received on the Portfolio.

On February 21, 2019, the Company announced the extension of the term for additional five years with the new termination date of December 1, 2024 (the Termination Date). On December 1, 2019, in connection with the term extension, the fixed rate of cumulative monthly dividend paid on the Preferred Shares (the Preferred Shares) was increased to 5.5% per annum based on the issue price of $10.00. Holders of the Class A Shares (the Class A Shares) may receive regular monthly cash dividends targeted at $0.10 per Class A Share, yielding 8% per annum on the original issue price of $15.00. The Class A Share dividends are currently suspended because the NAV of the Company is below 1.5 times (x) the principal amount of the outstanding Preferred Shares. Furthermore, no monthly distributions to the Class A Shares can be made if the dividends of the Preferred Shares are in arrears, and no special distributions can be made if the NAV of the Company is below $25.00.

The Company’s board of directors may extend the Termination Date for further terms of five years each. 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 Company completed one overnight offering on October 31, 2019, raising $68.0 million in gross proceeds. The total outstanding amount of the Preferred Shares and Class A Shares is currently 53.5 million of shares for each class.

Following the stock market sell-off in response to the worldwide spread of Coronavirus Disease (COVID-19) and various geopolitical news, the Preferred Shares experienced a decline in downside protection. As of April 30, 2020, the downside protection available to the Preferred Shares was 31.7%. The dividend coverage ratio was approximately 1.2x. Although the recent market volatility has had a negative impact on the NAV of the Portfolio, the current level of downside protection, and consistent dividend distributions on the underlying companies continue to support the current rating. Based on these considerations and the aforementioned performance metrics, DBRS Morningstar confirmed the Pfd-3 rating of the Company’s Preferred Shares.

The main constraints on the rating are (1) the Company’s dependence on the value and dividend policies of the securities in the Portfolio; (2) the reliance on the Portfolio manager to generate additional income through methods such as option writing; and (3) market fluctuations resulting from the response to worldwide spread of coronavirus that could further affect the NAV of the Company.

CORONAVIRUS-RELATED ANALYTICAL CONSIDERATIONS

Global macroeconomic forecasts have shifted dramatically amid the rapid spread of the coronavirus 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, which will be followed by a recovery in subsequent years. DBRS Morningstar analyzed the sensitivity of the current rating on the Preferred Shares to the impact of this scenario on the levels of downside protection and dividend coverage. Although DBRS Morningstar expects a significant negative impact in the short-term, considering the remaining term to maturity, the Company 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.

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