DBRS Morningstar Confirms Big Pharma Split Corp. Preferred Shares at Pfd-3 (high)

DBRS Limited (DBRS Morningstar) confirmed the rating of Pfd-3 (high) on the Preferred Shares issued by Big Pharma Split Corp. (the Company). The Company invests in a portfolio (the Portfolio) of approximately equally weighted common shares and securities convertible into or exchangeable for common shares (Equity Securities) of 10 issuers from the investable universe, which is defined as Equity Securities that (1) are listed on a North American exchange, (2) pay a dividend, and (3) have options in respect of its Equity Securities that are sufficiently liquid to permit the Portfolio Manager (Harvest Portfolio Group Inc.) to write options regarding such securities. The Portfolio Manager reconstitutes and rebalances the Portfolio at least semiannually. No more than 20% of the net asset value (NAV) of the Company can be invested in securities other than from the 10 largest pharmaceutical issuers.

Holders of the Preferred Shares receive a quarterly fixed cumulative dividend in the amount of $0.125 per share to yield 5.00% per year on the issue price of $10.00. Holders of the Class A Shares receive regular monthly noncumulative distributions targeted to be $0.1031 per Class A Share to yield 8.25% per year on the issue price of $15.00. The Class A Share distributions are subject to the asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.00 or if the dividends of the Preferred Shares are in arrears.

As of October 5, 2020, the downside protection available to the Preferred Shares was 57.7%. During the Coronavirus Disease (COVID-19) pandemic market downturn in March 2020, the downside protection experienced a sudden drop. It has returned to its average high 50s percent levels by the end of May 2020 and has remained steady since then. Considering the main focus of the Portfolio is the pharmaceutical industry, the underlying share prices will remain sensitive to market and industry developments. The dividend coverage ratio was 0.5 times. Regular distributions to holders of the Class A Shares along with Company’s operational expenses are projected to cause an average annual portfolio grind of about 6.6% in the remaining term. To supplement Portfolio income, the manager engages in call option writing.

The redemption date for both classes of shares is December 31, 2022. The Company’s board of directors may extend the term beyond the redemption date for additional terms of five years each. On maturity, the holders of the Preferred Shares will be entitled to the value of the Portfolio up to the face value of the Preferred Shares and any accrued but unpaid dividends in priority to the holders of the Class A Shares.

Considering the credit quality and diversification of the Portfolio, as well as the amount of downside protection available to the Preferred Shares and a consistent dividend paying history of the underlying companies in the Portfolio, DBRS Morningstar confirmed the rating on the Preferred Shares at Pfd-3 (high).

The main constraints to the rating are the following:

(1) Sensitivity of the Company’s NAV to volatility of prices of the Portfolio securities.
(2) Potential foreign-exchange risk because the income received on the Portfolio is not hedged.
(3) Stated distributions to the Class A Shares.
(4) Potential changes in the dividend policies of the underlying companies.
(5) The healthcare industry-specific risks.

CORONAVIRUS-RELATED ANALYTICAL CONSIDERATIONS
This rating action was based on factors that included additional analysis and, where appropriate, additional assumptions 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 September 10, 2020, in its “Global Macroeconomic Scenarios: September Update” at https://www.dbrsmorningstar.com/research/366543/dbrs-morningstar-global-macroeconomic-scenarios-september-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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