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 across industries and geographies. Some major industries the Fund invests in are Financials (40.1%), Energy (20.5%), Health Care (20.5%), Materials (19.4%), and Industrials (9.9%), with weight distributions as of December 31, 2020. The Series 1 Preferred Units are retractable for cash at the option of the holder on or after March 15, 2024. The Series 2 Preferred Units are retractable for cash at the option of the holder on or after March 15, 2025.

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. To mitigate the currency exchange risk, the Fund may enter into foreign exchange contracts.

Holders of the Fund Units (the Units) currently receive targeted monthly cash distributions of $0.10, amounting to $1.20 per annum. 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 9, 2020, 69,000 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, 2020.

The Fund has the ability to issue additional Units through overnight or at-the-market (ATM Program) offerings. During November 2020, the Fund renewed its ATM Program, which was initially established in July 2019. The program allows the Fund to issue up to $200 million of the 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, 2020, 3.2 million Units were issued for gross proceeds of $29.8 million.

As of April 12, 2021, the downside protection available to the Preferred Units was approximately 82%. The distribution coverage ratio was approximately 1.1 times.

On September 23, 2020, the Fund entered into a new prime broker arrangement for its lending with a Tier 1 Bank. The outstanding balance on its previous credit facility was repaid in full. The Fund is restricted by its Declaration of Trust from borrowing in excess of 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 bank. Borrowings under the Margin Facility are repayable on demand and secured by Portfolio securities of the Fund. Outstanding amounts borrowed and any other indebtedness on the Margin Facility of the Fund to the bank 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 rating of Pfd-2 (high) on the Preferred Units issued by the Fund.

The main constraints to the rating 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 the absence of a hedge on some investments in foreign currencies.
(3) The priority of the lenders under the Credit Facility over the Fund’s assets up to the amount of credit outstanding.
(4) Market fluctuations resulting from the response to the worldwide spread of the Coronavirus Disease (COVID-19) that could negatively affect the Company’s net asset value.

The rating includes additional analysis on the expected performance as a result of the global efforts to contain 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 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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