DBRS Morningstar Confirms North American Financial 15 Split Corp. Preferred Shares at Pfd-4 (high)

DBRS Limited (DBRS Morningstar) confirmed the rating on the Preferred Shares issued by North American Financial 15 Split Corp. (the Company) at Pfd-4 (high). The Company holds a portfolio (the Portfolio) that consists of common shares of approximately 15 North American financial services companies: Bank of America Corporation; Bank of Montreal; The Bank of Nova Scotia; Canadian Imperial Bank of Commerce; CI Financial Corp.; Citigroup Inc.; The Goldman Sachs Group, Inc.; Great-West Lifeco Inc.; JPMorgan Chase & Co.; Manulife Financial Corporation; National Bank of Canada; Royal Bank of Canada; Sun Life Financial, Inc.; The Toronto-Dominion Bank; and Wells Fargo & Company. Up to 15% of the Company’s net asset value (NAV) may be invested in securities of issuers other than those mentioned above and no more than 10% of the Company’s NAV may be invested in any single issuer. Approximately 49.9% of the Portfolio was invested in U.S. dollars (USD) as of November 30, 2020. The Company may use derivatives for hedging purposes. The termination date is December 1, 2024.

On September 23, 2020, the Company announced the Preferred Share dividend rate increase for the fiscal year beginning December 1, 2020. The Preferred Shares currently pay a fixed cumulative monthly dividend of $0.05625 per Preferred Share, yielding 6.75% annually on their issue price of $10.00 per share. Monthly distributions to holders of the Class A Shares make up $0.11335 per share. No distributions will be paid to Class A Shares if the NAV per unit falls below $15.00 and no special year-end dividends will be paid if, after such payment, the Portfolio’s NAV is less than $25.00.

The Portfolio provides approximately 35.7% of downside protection as at February 26, 2021.

The Preferred Share dividend coverage ratio is approximately 0.4 times. The average grind on the Portfolio is expected to be 5.3% annually for the next four years. To supplement dividend income received on the Portfolio, the Company may engage in option writing.

Based on the current amount of the downside protection and above-mentioned Portfolio metrics, the rating on the Preferred Shares was confirmed at Pfd-4 (high).

The main challenges are:

(1) Market fluctuations resulting from the response to the worldwide spread of the Coronavirus Disease (COVID-19) that could affect the NAV of the Company.
(2) The reliance on the Portfolio manager to generate additional income through methods such as option writing.
(3) The monthly cash distributions to holders of the Class A Shares which create grind in the Portfolio.
(4) The unhedged portion of the USD-denominated Portfolio that exposes the Portfolio to foreign currency risk.

The rating includes additional analysis on the performance expected as a result of the global efforts to contain the spread of the coronavirus pandemic. The DBRS Morningstar Sovereigns group initially published its outlook on the coronavirus’ impact on key economic indicators for the 2020–22 time frame. The scenarios were updated on January 28, 2021. For details, see “Global Macroeconomic Scenarios: January 2021 Update” at https://www.dbrsmorningstar.com/research/372842/global-macroeconomic-scenarios-january-2021-update.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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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