DBRS Morningstar Confirms Global Dividend Growth Split Corp.’s Preferred Shares at Pfd-3 (high)

DBRS Limited (DBRS Morningstar) confirmed the rating of Global Dividend Growth Split Corp.’s (the Company) Preferred Shares at Pfd-3 (high). The Company invests in a portfolio of equity securities of large capitalization global dividend growth companies (the Portfolio). Some major industries invested into are Healthcare (19.2%), Information Technology (19.1%), and Financials (16.9%). In order to qualify for inclusion in the Portfolio, each global dividend growth company comprising the Portfolio must (1) have a market capitalization of at least USD 10 billion and (2) have a history of dividend growth or have potential for future dividend growth. The Portfolio is approximately equally weighted and is rebalanced and/or may be reconstituted at least annually. A portion of the Portfolio’s investments is denominated in currencies other than Canadian dollars. The foreign currency exposure is substantially all hedged back to the Canadian dollar. In addition to, or instead of, investing in equity securities of global dividend growth companies directly, the Company may invest a portion of the Portfolio’s assets in exchange-traded funds that provide exposure to global dividend growth companies, including exchange-traded funds managed by Brompton Funds Limited (the Manager). The maturity date is June 30, 2021. The term of the Company may be extended beyond the maturity date for additional terms of five years each as determined by the Company’s board of directors.

Dividends received on the Portfolio are used to pay fixed cumulative quarterly dividend to holders of the Preferred Shares in the amount of $0.125 per share to yield 5.00% per annum on the issue price of $10.00. The holders of the Capital A Shares receive regular monthly noncumulative distributions targeted to be $0.10 per Class A Share to yield 10.00% per annum on the issue price of $12.00. No monthly distributions to the Class A Shares will be made if (1) distributions to the Preferred Shares are in arrears or (2) in respect of a cash distribution, the net asset value of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. Operating expenses and stated distributions to the Class A Shares are projected to create average annual grind on the Portfolio of approximately 8.4% until the end of the term.

Following the stock market sell-off in response to the worldwide spread of Coronavirus Disease (COVID-19) and various geopolitical news in March 2020, the Preferred Shares experienced a decline in downside protection. However, the Portfolio has experienced a partial recovery in downside protection of about 13% since March. As of June 4, 2020, the downside protection available to the Preferred Shares was 47.8%. The dividend coverage ratio was 0.17x. To supplement portfolio income, the Company has the ability to write covered call and put options or engage in security lending.

The confirmation of the Pfd-3 (high) rating is based on (1) the level of downside protection available to holders of the Preferred Shares, (2) the effect of stated distributions to the Class A Shares, (3) the quality of underlying securities in the Portfolio, and (4) the remaining term to maturity.

The main constraints to the rating are the following:

(1) The downside protection available to holders of the Preferred Shares depends on the value of the equity securities held in the Portfolio.

(2) Volatility of price and changes in the dividend policies of the underlying issuers may result in significant reductions in interest coverage or downside protection from time to time and has been witnessed in the past three months.

(3) Dividends and interest received on the Portfolio are currently unable to fully cover distributions on the Preferred Shares.

(4) Reliance on the Manager to generate additional yield on the Portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

(5) Stated monthly distributions on the Class A Shares, which will create a grind on the Portfolio mitigated by an asset coverage test of 1.5x, which ensures sufficient levels of downside protection to the holders of the Preferred Shares.

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 initially published macroeconomic scenarios on April 16, 2020. The scenarios were updated on June 1, 2020, and are reflecting the updated scenarios in DBRS Morningstar’s rating analysis. The updated scenarios can be found at https://www.dbrsmorningstar.com/research/361867.

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, 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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