DBRS Morningstar Downgrades Five Preferred Shares Ratings

DBRS Limited (DBRS Morningstar) downgraded five ratings of preferred shares issued by various split-share companies as follows:

-- the Preferred Shares issued by Dividend Growth Split Corp. to Pfd-4 (high) from Pfd-3
-- the Preferred Shares issued by Brompton Lifeco Split Corp. to Pfd-4 (low) from Pfd-3 (low)
-- the Preferred Shares issued by Life & Banc Split Corp to Pfd-3 (low) from Pfd-3
-- the Preferred Shares issued by Prime Dividend Corp to Pfd-3 from Pfd-3 (high)
-- the Preferred Shares issued by S Split Corp. to Pfd-4 from Pfd-3 (collectively, the Preferred Shares)

Each of these split-share companies invests in a portfolio of securities (the Portfolio) funded by issuing two classes of shares: dividend-yielding preferred shares or securities and capital shares or units (the Capital Shares). In such structure, preferred shares normally benefit from downside protection provided by the net asset value (NAV) of the Capital Shares.

On March 24, 2020, DBRS Morningstar placed the Preferred Shares Under Review with Negative Implications. Each of the Preferred Shares has experienced a considerable reduction in downside protection since February 2020 as a result of the rapid decline in the net asset value (NAV) of the respective portfolios in response to the stock market sell-off, which was triggered by the worldwide spread of Coronavirus Disease (COVID-19) and various geopolitical events.

DBRS Morningstar downgraded the ratings of the Preferred Shares based on longer-term trends being established for the NAVs of the affected split-share companies. Although the downside protection has experienced some recovery in all five Portfolios in the past three months, its current levels remain below the required levels for the corresponding ratings of the Preferred Shares, which they had had before they were placed Under Review with Negative Implications. Ratings assigned are also dependent on the credit quality and management of the Portfolios. For many of the split-share companies listed above, distributions to holders of the Capital Shares are now suspended due to the failure to pass the asset-coverage tests. This feature ensures greater excess income for the Company and decreases the reliance on other income-generating methods, such as option writing, when downside protection has been significantly reduced.

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/document/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 (June 23, 2020), 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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