DBRS Morningstar Assigns Provisional Rating of Pfd-3 to Sustainable Power & Infrastructure Split Corp., Preferred Shares

DBRS Limited (DBRS Morningstar) assigned a provisional rating of Pfd-3 to the Preferred Shares to be issued by Sustainable Power & Infrastructure Split Corp. (the Company). Brompton Funds Limited will act as the manager of the Company (the Manager). The Company will issue an equal number of Preferred Shares and Class A Shares at an issue price of $10.00 per Preferred Share and $10.00 per Class A Share. From time to time or during the events of issuance, redemption, or retraction, the number of Class A Shares outstanding may exceed the number of the Preferred Shares outstanding. It is expected that such excess will generally not be more than 10%, and the excess of over 10% should not be outstanding for more than 15 days. The Preferred Shares will be scheduled to mature on May 29, 2026. The term of the Company may be extended beyond the maturity date for additional terms of five years each as determined by the Company’s board of directors.

Net proceeds from the offering will be used to invest in a globally diversified portfolio (the Portfolio) of dividend paying securities of power and infrastructure companies whose assets, products, and services the Manager believes are facilitating the multi-decade transition toward decarbonization and environmental sustainability. The Portfolio will be actively managed in accordance with the Company’s investment objectives, strategy, and restrictions, and the Manager expects it will be composed of at least 15 securities from companies with a market capitalization of at least $2 billion, operating in areas of renewable power, green transportation, energy efficiency, and communications among others. In addition, up to 25% of the Portfolio may be invested indirectly through exchange traded funds managed by the Manager. The indicative Portfolio includes securities from 31 approximately equally weighted, mostly investment-grade companies, well diversified by geographic and sector allocation. A portion of the Portfolio’s investments will be denominated in currencies other than Canadian dollars, and this exposure is expected to be substantially hedged back to the Canadian dollar.

The Preferred Shares will be entitled to fixed quarterly cumulative preferential cash distributions of $0.125 (or $0.5 annually) per share, representing a 5.0% per-annum return on the issue price of $10.00. Holders of the Class A Shares will receive regular monthly noncumulative distributions targeted to be $0.06667 (or $0.8 annually) per Class A Share to yield 8.0% per annum on the issue price of $10.00. No monthly distributions to the Class A Shares will be made if (1) distributions to the Preferred Shares are in arrears or (2) in respect of a cash distribution, the net asset value (NAV) of the Company falls below 1.5 times the principal amount of the outstanding Preferred Shares. To supplement Portfolio income, the Manager may engage in covered call options on all or a portion of the shares held in the Portfolio, engage in securities lending, and rely on realized capital gains.

Based on the minimum offering size and indicative Portfolio, the initial downside protection available to holders of the Preferred Shares is expected to be approximately 48% and the dividend coverage ratio is expected to be 0.7 times.

The Company may establish a loan facility for working capital purposes, with the maximum amount of 5% of the NAV of the Company. The Company may pledge the Portfolio securities as collateral for amounts borrowed under the loan facility.

The Company may issue an unlimited number of Preferred Shares, Class A Shares, Class J Shares, and additional classes of shares. The Preferred Shares rank in priority to the Class A Shares with respect to the payment of distributions and the repayment of capital on the dissolution, liquidation, or winding-up of the Company. The Class A Shares rank subsequent to the Preferred Shares, and the Class J Shares rank subsequent to both the Preferred Shares and the Class A Shares with respect to distributions on the dissolution, liquidation, or winding-up of the Company. There are 100 Class J Shares issued and outstanding at an issue price of $1 per share, and no additional Class J Shares can be issued until all the Class A Shares and Preferred Shares have been retracted, redeemed, or purchased for cancellation.

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 by unpaid dividends in priority to the holders of the Class A Shares and the Class J Shares.

The provisional rating is primarily based on (1) the level of downside protection available to holders of the Preferred Shares, (2) the indicative Portfolio quality and underlying securities correlation, (3) the effect of stated distributions to the Class A Shares, and (4) term to maturity of the Preferred Shares.

The main constraints to the provisional rating are the following:

(1) The downside protection available to holders of the Preferred Shares will depend on the value of the securities held in the Portfolio.

(2) Volatility of price and changes in the dividend policies of the underlying issuers may result in significant reductions in interest coverage or downside protection from time to time.

(3) Dividends and interest received on the Portfolio are currently unable to fully cover distributions on the Preferred Shares.

(4) Reliance on the Manager to generate a high yield on the investment Portfolio to meet distributions and other trust expenses without having to liquidate Portfolio securities.

The rating includes additional analysis on the expected performance as a result of the global efforts to contain the Coronavirus Disease (COVID-19). The DBRS Morningstar Sovereigns group initially published its outlook on the coronavirus’ impact on key economic indicators for the 2020–22 time frame on April 16, 2020. The scenarios were updated on March 17, 2021. For details, see “Global Macroeconomic Scenarios: March 2021 Update” at https://www.dbrsmorningstar.com/research/375376.

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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