DBRS Morningstar Upgrades Life & Banc Split Corp. Preferred Shares Rating to Pfd-3

DBRS Limited (DBRS Morningstar) upgraded its rating on the Preferred Shares issued by Life & Banc Split Corp. (the Company) to Pfd-3 from Pfd-3 (low). The Company invests in a portfolio of common shares (the Portfolio) issued by the six major banks in Canada (Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and The Toronto-Dominion Bank) and four Canadian life insurance companies (Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc., Manulife Financial Corporation, and Sun Life Financial Inc.). The Portfolio is approximately equally weighted and rebalanced at least annually. The maturity date is October 30, 2023. The board of directors may extend the Company’s share term by successive terms of up to five years, provided that shareholders are given an optional retraction right at the end of each successive term.

Holders of the Preferred Shares are entitled to fixed cumulative quarterly dividends, offering a return of 5.45% per year on the original issue price of $10.00 per share. Holders of Class A Shares receive monthly distributions targeted at $0.10 per share. As protection to the holders of the Preferred Shares, an asset coverage test does not permit the Company to make monthly distributions to the Class A Shares if the dividends of the Preferred Shares are in arrears or if the net asset value (NAV) of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. In addition, no special distributions can be made to the Class A Shares if, after such distribution, the NAV of the Portfolio is below $25.00.

The Company has the ability to write covered call options or engage in securities lending with respect to the common shares of the Portfolio to generate additional income to supplement dividend distributions. Securities lending exposes the Portfolio to the risk of loss if the borrower defaults on its obligations to return the borrowed securities and if the collateral is insufficient to reconstitute the portfolio of loaned securities.

On January 27, 2021, the Company completed a treasury offering of the Class A and Preferred Shares, raising $53.8 million in gross proceeds.

As of May 31, 2021, the downside protection available to the Preferred Shares was 49.2% and the dividend coverage ratio was about 1.0x. After experiencing a sharp decline in March 2020, the downside protection has recovered the losses within a year. It currently continues the upward trend. Taking into consideration the credit quality and diversification of the Portfolio as well as the amount of downside protection available to the Preferred Shares, DBRS Morningstar has upgraded the rating on the Preferred Shares to Pfd-3 from Pfd-3 (low).

The main constraints to the rating are as follows:
(1) The Company’s dependence on the value and dividend policies of the securities in the Portfolio.
(2) The reliance on the portfolio manager to generate a high yield on the Portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.
(3) 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
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577