DBRS Morningstar Confirms Canadian General Investments, Limited’s Preference Shares, Series 4 at Pfd-1 (low)

DBRS Limited (DBRS Morningstar) confirmed the rating on the 3.75% Cumulative Redeemable Class A Preference Shares, Series 4 (the Series 4 Preference Shares) issued by Canadian General Investments, Limited (the Company) at Pfd-1 (low). The Series 4 Preference Shares will be retractable at the option of their holders on or after June 15, 2023.

The Company’s portfolio (the Portfolio) is a well-diversified, actively managed portfolio of common shares, which includes approximately 50 to 60 well-known names allocated among 11 major sectors with Information Technology, Industrials, Materials, Consumer Discretionary, and Financials receiving the largest allocation of approximately 81% collectively as at June 9, 2020. Series 4 Preference Shareholders are entitled to cash dividends of $0.9375 per annum (p.a.), yielding 3.75% p.a. on the initial issue price. Common shareholders receive quarterly distributions of $0.21. The Company may also consider paying a special capital gains dividend at year end.

On June 5, 2019, the Company entered into an amended and restated credit agreement with a Canadian chartered bank (the Bank) for a $100 million credit facility. On May 12, 2020, this credit facility was converted to a fixed-term facility with a maturity date of May 12, 2021. The Bank holds a security interest in the Company’s Portfolio assets. Loan interest and principal payments rank in priority to any other distributions from the Portfolio.

As of June 5, 2020, the downside protection available to the Series 4 Preference Shareholders was approximately 81.4%. Regular distributions to the Company’s common shareholders along with Company’s operational expenses are projected to cause a portfolio grind of about 2.4% p.a. for the remaining term; however, the strong asset coverage test of 5.4 times (x) provides enough cushion for the Series 4 Preference Shares because it is well above 2.5x, which prevents any distributions to common shareholders. Although the Portfolio experienced a decline in value in March 2020 related to the worldwide spread of the Coronavirus Disease (COVID-19) and various geopolitical events, its downside protection has fully recovered to its pre-pandemic level. The Company also generates additional income through particular investment strategies as well as securities lending. Foreign-currency investments in the Portfolio are not hedged.

The confirmation of the rating at Pfd-1 (low) is based on the amount of downside protection available, the Portfolio composition, and the Company’s overall performance metrics.

The main constraints on the rating are (1) the Company’s dependence on the value and dividend policies of the Portfolio securities and (2) reliance on the Portfolio manager to generate additional income through methods such as capital gains and securities lending.

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 reflected in DBRS Morningstar’s rating analysis. The updated scenarios can be found at https://www.dbrsmorningstar.com/document/361867.

Under the moderate scenario, DBRS Morningstar expects a significant economic contraction in Canada and the United States in 2020, followed by a recovery in subsequent years. DBRS Morningstar analyzed the sensitivity of the current rating on the Series 4 Preference 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, DBRS Morningstar expects the Company to have enough time to benefit from a stock market rebound as 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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