DBRS Morningstar Upgrades Brompton Lifeco Split Corp. Preferred Shares Rating to Pfd-3 (low)

DBRS Limited (DBRS Morningstar) upgraded its rating on the Preferred Shares issued by Brompton Lifeco Split Corp. (the Company) to Pfd-3 (low) from Pfd-4 (low).

The Company holds a portfolio (the Portfolio) consisting of common shares of the four largest publicly traded Canadian life insurance companies: Great-West Lifeco Inc., Sun Life Financial, Inc, Manulife Financial Corporation, and Industrial Alliance Insurance and Financial Services Inc. The Portfolio is approximately equally weighted and is rebalanced at least annually. The maturity date is April 29, 2024. On maturity, the holders of the Preferred Shares are entitled to receive the value of the Company up to the face value of the Preferred Shares. Holders of the Class A Shares will receive the remaining value of the Company. The term of the Company may be extended further beyond the new maturity date for additional terms of five years each, as determined by the Company’s board of directors.

The Preferred Shares are entitled to receive fixed cumulative, quarterly distributions in the amount of $0.15625 per preferred share, yielding 6.25% annually on the issue price of $10.00 per share. Holders of the Class A Shares receive regular monthly cash distributions targeted at $0.075 per share. No monthly distributions on the Class A Shares will be made if the Preferred Share distributions 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. Furthermore, no special distributions in excess of $0.075 per month will be made if the NAV of the Company is below $25.00. The Company has the ability to write covered-call options or cash-covered put options with respect to all or part of the common shares of the Portfolio and may also engage in securities lending to generate additional income to supplement the dividends received on the Portfolio.

The main form of credit enhancement available to the Preferred Shares is a buffer of downside protection. Downside protection corresponds to the percentage decline in market value of the Portfolio that must be experienced before the Preferred Shares would be in a loss position. As at May 31, 2021, the amount of downside protection available to the Preferred Shares was 39.0%. The dividend coverage ratio was 0.7x.

In its analysis, DBRS Morningstar has considered the current level and trend of downside protection of the Company. After experiencing a sharp decline in March 2020, the downside protection has fully recovered the losses within a year. Some other important rating considerations were the credit quality and diversification of the Portfolio as well as changes in dividend policies of the underlying companies in the Portfolio. Based on these considerations and performance metrics, DBRS Morningstar upgraded the rating of the Preferred Shares issued by the Company to Pfd-3 (low) from Pfd-4 (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 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
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577