DBRS Morningstar Confirms Rating of Dividend 15 Split Corp.’s Preferred Shares at Pfd-3

DBRS Limited (DBRS Morningstar) confirmed the rating of the Preferred Shares issued by Dividend 15 Split Corp. (the Company) at Pfd-3. The Company invests in a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio), which are issued by the following 15 core companies: Bank of Montreal, Bank of Nova Scotia, BCE Inc., CI Financial Corp., Canadian Imperial Bank of Commerce, Enbridge Inc., Manulife Financial Corporation, National Bank of Canada, Royal Bank of Canada, Sun Life Financial Inc., TELUS Corporation, Thomson Reuters Corporation, The Toronto-Dominion Bank, TransAlta Corporation, and TC Energy Corp. Up to 15% of the net asset value (NAV) of the Portfolio may be invested in equity securities of issuers other than the companies listed above. The Portfolio is actively managed by Quadravest Capital Management Inc. The Company has the ability to write covered call options in respect of some or all of the common shares held in the Portfolio to generate additional income.

Dividends received from the Portfolio are used to pay the holders of the Preferred Shares fixed cumulative monthly dividends in the amount of $0.04583 per Preferred Share, yielding 5.5% annually. Holders of the Class A Shares receive regular monthly cash dividends targeted at $0.10 per Class A Share, yielding 8% per annum on the original issue price of $15.00. No monthly distributions to the Class A Shares will be made if the dividends of the Preferred Shares are in arrears or if the NAV of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions can be made if the NAV of the Company is below $25.00.

The termination date is December 1, 2024. The Company’s board of directors may extend the termination date for further terms of five years each. At maturity, the holders of the Preferred Shares will be entitled to the value of the Company up to the face amount of the Preferred Shares in priority to the holders of the Class A Shares. Holders of the Class A Shares will receive the remaining value of the Company.

The Company completed four overnight offerings in the past year, bringing the total outstanding units (one Preferred Share and one Class A Share) to 73.2 million and raising $204.5 million in gross proceeds.

As of April 30, 2021, the downside protection available to the Preferred Shares was 41.3%. The dividend coverage ratio was approximately 0.8x. The downside protection has had a quick recovery since the March 2020 market downturn. The amount of downside protection and consistent dividend distributions on the underlying companies continue to support the current rating. Based on these considerations and the aforementioned performance metrics, DBRS Morningstar confirmed the Pfd-3 rating of the Company’s Preferred Shares.

The main constraints to the rating are as follows:

(1) The downside protection available to holders of the Preferred Shares depends on the value and dividend policies of the securities in the Portfolio.

(2) Additional yield earned on the Portfolio to cover Class A Share distributions without having to liquidate Portfolio securities will depend on the manager’s skill in generating supplementary income through methods such as option writing.

(3) Stated monthly distributions on the Class A Shares, which will create a grind on the Portfolio, are mitigated by an asset coverage test of 1.5x, which ensures sufficient levels of downside protection to the holders of the Preferred Shares.

(4) Market fluctuations resulting from the response to the worldwide spread of the Coronavirus Disease (COVID-19) that could negatively affect the Company’s NAV.

The rating includes additional analysis of the expected performance as a result of the global efforts to contain the coronavirus. 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. DBRS Morningstar last updated the macroeconomic scenarios on March 17, 2021, in its “Global Macroeconomic Scenarios: March 2021 Update” at https://www.dbrsmorningstar.com/research/375376.

ESG CONSIDERATIONS
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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577