DBRS Morningstar Downgrades Dividend 15 Split Corp. II Preferred Shares to Pfd-4 from Pfd-3 (low), Removes from UR-Neg. Status

DBRS Limited (DBRS Morningstar) downgraded the Preferred Shares (the Preferred Shares) issued by Dividend 15 Split Corp. II (the Company) to Pfd-4 from Pfd-3 (low). The Company holds a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio), which are issued by the following 15 companies: Bank of Montreal, The 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. Quadravest Capital Management Inc. actively manages the Portfolio. 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 May 22, 2020, DBRS Morningstar placed the Preferred Shares Under Review with Negative Implications. The Preferred Shares have experienced a considerable reduction in downside protection since February 2020 as a result of the rapid decline in the NAV of the portfolio in response to the stock market sell-off, which was triggered by the worldwide spread of Coronavirus Disease (COVID-19) and various geopolitical events. With this downgrade, the rating of the Preferred Shares has been removed from Under Review with Negative Implications.

As at July 15, 2020, the downside protection available to the Preferred Shares was 21.2%. The dividend coverage ratio was approximately 0.8 times (x). Holders of the Preferred Shares continue to receive fixed cumulative monthly cash distributions of $0.04792 per Preferred Share, yielding 5.75% annually on the original issue price of $10.00. Distributions to the Class A Shares have been suspended since March 2020 because they have not met the NAV test of 1.5x.

DBRS Morningstar downgraded the rating on the Preferred Shares based on longer-term trends being established for the NAV. Although the downside protection has experienced some recovery in the past three months, its current level combined with a dividend coverage below 1.0, are commensurate with a Pfd-4 rating.

CORONAVIRUS-RELATED ANALYTICAL CONSIDERATIONS

This rating action was based on factors that included additional analysis and, where appropriate, additional assumptions were applied to expected performance as a result of the global efforts to contain the spread of the coronavirus. On April 16, 2020, the DBRS Morningstar Sovereigns group published its outlook on the impact on key economic indicators for the 2020–22 time frame. DBRS Morningstar last updated the macroeconomic scenarios on July 22, 2020, in its “Global Macroeconomic Scenarios: July Update” at https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-update. For the current rating action, DBRS Morningstar’s analysis considered impacts consistent with the moderate scenario in the referenced commentary.

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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