DBRS Limited (DBRS Morningstar) finalized its provisional rating of Pfd-3 on the Preferred Shares issued by Sustainable Power & Infrastructure Split Corp. (the Company). Brompton Funds Limited will act as the manager of the Company (the Manager). The Company issued 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. Thus, one Preferred Share and one Class A Share comprise one unit (the Unit). From time to time or during the events of issuance and 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% of the number of Preferred Shares outstanding, and the excess of over 10% should not be outstanding for more than 15 days. The Preferred Shares are scheduled to mature on May 29, 2026. The term of the Company may be extended beyond the maturity date for additional terms of up to five years each as determined by the Company’s board of directors. On maturity, the holders of the Preferred Shares will be entitled to the value of the globally diversified portfolio (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.
Net proceeds from the offering will be invested in 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.
Holders of the Preferred Shares are entitled to receive a quarterly fixed cumulative dividend in the amount of $0.1250 per share to yield 5.00% per annum on the issue price of $10.00. Holders of the Class A Shares will receive regular monthly noncumulative distributions targeted to be $0.06667 per Class A Share to yield 8.00% per annum on the issue price of $10.00. No monthly distributions to the Class A Shares will be made if the dividends of the Preferred Shares are in arrears or if the net asset value (NAV) per Unit falls below $15.00.
The fixed distributions of dividends on the Preferred Shares will be funded from the dividends received on the common shares in the Portfolio, which are expected to cover approximately 0.7 times the annual Preferred Share distributions. To supplement Portfolio income, the Manager may engage in covered call options and put option writing on all or a portion of the shares held in the Portfolio, engage in securities lending, and rely on realized capital gains.
The initial downside protection available to holders of the Preferred Shares is approximately 48% (after offering expenses). Downside protection available to the Preferred Shares consists of the NAV of the Class A Shares.
The Pfd-3 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) the 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 the Preferred Shares dividend 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) 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.
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 firstname.lastname@example.org.
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.
The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at email@example.com.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at firstname.lastname@example.org.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577