DBRS Morningstar Confirms Ratings of Canoe EIT Income Fund Cumulative Redeemable Series 1 and Series 2 Preferred Units at Pfd-2 (high)

DBRS Limited (DBRS Morningstar) confirmed the ratings of the Cumulative Redeemable Series 1 Preferred Units (the Series 1 Preferred Units) and the Cumulative Redeemable Series 2 Preferred Units (the Series 2 Preferred Units; collectively with the Series 1 Preferred Units, the Preferred Units) issued by Canoe EIT Income Fund (the Fund) at Pfd-2 (high). The Fund is a closed-end, actively managed investment trust focused on a broad range of income-producing investments in various industries, currencies, and geographic regions. The Fund’s portfolio (the Portfolio) is broadly diversified, with investments in the financial sector (representing 31.7% of the total Portfolio as of December 31, 2021), the energy sector (20.0%), healthcare (18.9%), industrials (11.0%), and materials (10.0%). Investments in the consumer discretionary, real estate, communication services, consumer staples, and IT sectors, together with corporate bonds and cash, and net of liabilities, represented the remaining 8.4%. The Fund is exposed to foreign exchange risk as some of the securities held in the Portfolio are denominated in currencies other than the Canadian dollar. As of December 31, 2021, 42.1% of the total Portfolio was exposed to the U.S. dollar but was partially hedged with borrowings in the same currency. The Fund may enter into foreign exchange contracts to further mitigate currency exchange risk.

The Preferred Unit holders receive quarterly cumulative preferential cash distributions of $0.30 (or $1.20 annually), representing a 4.80% annual return on the issue price of $25.00. The distributions are mainly funded through income received from the income-generating securities in the Portfolio. The Fund may also engage in writing covered call options to supplement the income.

The Fund may redeem all or, from time to time, any part of the Preferred Units at various prices after specific dates. The Series 1 Preferred Units are redeemable at the option of the Fund, beginning on March 15, 2022, and the Series 2 Preferred Units are redeemable at the option of the Fund, beginning on March 15, 2023. As of March 31, 2022, none of the Preferred Units have been redeemed. The Preferred Units are retractable for cash at the option of the holder on or after March 15, 2024, for the Series 1 Preferred Units and on or after March 15, 2025, for the Series 2 Preferred Units.

Holders of the Fund Units (the Units) currently receive targeted monthly cash distributions of $0.10, amounting to $1.20 per year. In addition, up to 10% of the aggregate outstanding Units may be redeemed at the option of the Unit holders each calendar year on a date determined by the Fund. On December 10, 2021, 31,000 of the outstanding Units were redeemed for cash as part of the regular annual redemption option. The Fund did not purchase any Units in the open market during the year ended December 31, 2021.

The Fund has the ability to issue additional Units through an at-the-market equity program (ATM Program). The issuance of additional Units increases the level of downside protection available to the Preferred Unit holders. During December 2021, the Fund renewed its ATM Program, which was initially established in July 2019. The program currently allows the Fund to issue up to $300 million worth of Units to the public at the manager's discretion. The ATM Program will be effective until December 25, 2022. During the year ended December 31, 2021, 15.6 million Units were issued for gross proceeds of $188.5 million.

As of March 28, 2022, the downside protection available to the Preferred Units was approximately 87%, up from 81% a year ago. The projected distribution coverage ratio is greater than 1 time.

On September 23, 2020, the Fund entered into a prime broker arrangement for its lending with a Tier 1 Bank (the Custodian). The Fund’s Declaration of Trust restricts it from borrowing more than 20% of the Fund’s total assets at the time of borrowing, after giving effect to the borrowing. Under the prime broker arrangement, the Fund has access to a margin facility (the Margin Facility) that permits the Fund to buy and sell securities on margin in Canadian and U.S. funds up to an aggregate borrowing amount not exceeding the value of the collateral Portfolio securities held by the Custodian. Borrowings under the Margin Facility are repayable on demand and secured by Portfolio securities of the Fund. Payment of outstanding amounts borrowed and any other indebtedness on the Fund’s Margin Facility take priority over distributions on the Preferred Units. Distributions on the Preferred Units are also restricted if a default or event of default occurs under the Margin Facility.

Based on the level of downside protection, the distribution coverage ratio and diversification of the Portfolio, DBRS Morningstar confirmed the ratings of Pfd-2 (high) on the Preferred Units issued by the Fund.

The main constraints to the ratings are the following:

(1) The potential grind on the Portfolio arising from redemption rights and distributions to the Units.
(2) The foreign-exchange risk as a result of no hedge on some investments in foreign currencies.
(3) The priority of the amounts owed to the Custodian under the prime broker arrangement over the Fund’s assets up to the amount of credit outstanding.

There was no Environmental, Social, or Governance factors or consideration with a significant or relevant impact on the credit rating.

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 28, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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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