DBRS Morningstar Confirms Canadian General Investments, Limited’s Preference Shares, Series 4 Rating at Pfd-1 (low)

DBRS Limited (DBRS Morningstar) confirmed its rating on the 3.75% Cumulative Redeemable Class A Preference Shares, Series 4 (the Series 4 Preference Shares) issued by Canadian General Investments, Limited (the Company) at Pfd-1 (low). The Series 4 Preference Shares will be retractable at the option of their holders on or after June 15, 2023.

The Company’s portfolio (the Portfolio) is a well-diversified, actively managed portfolio of common shares, which includes approximately 50 to 60 well-known names allocated among nine major sectors with Information Technology, Industrials, Materials, Consumer Discretionary, and Financials receiving the largest allocation of approximately 87% collectively as at June 4, 2021. Series 4 Preference Shareholders are entitled to cash dividends of $0.9375 per annum (p.a.), yielding 3.75% p.a. on the initial issue price. Common shareholders currently receive quarterly distributions of $0.22. The Company generates additional income through securities lending. Foreign-currency investments in the Portfolio are not hedged.

As of June 7, 2021, the downside protection available to shareholders of the Series 4 Preference Shares was approximately 86.5%. Regular distributions to the Company’s common shareholders along with Company’s operational expenses are projected to cause a portfolio grind of about 2.0% p.a. for the remaining term. The strong asset coverage test of 7.4 times (x) provides enough cushion for the Series 4 Preference Shares as it is well above the level at which any distributions to common shareholders are suspended (2.5x). Although the Portfolio experienced a decline in value in March 2020, its downside protection has fully recovered within a year and continues the upward trend.

On May 12, 2021, the Company entered into a prime brokerage services agreement with a Canadian chartered bank (the Bank), replacing the former credit facility agreement with the same bank. Margin borrowing of $100 million under this new facility has been used to repay the $100 million borrowed under the former credit facility. The Bank holds a security interest in the Company’s Portfolio assets. Interest payments in the margin account rank in priority to any other distributions from the Portfolio.

The confirmation of the rating at Pfd-1 (low) is based on the amount of downside protection available, the Portfolio composition, and the Company’s overall performance metrics.

The main constraints on the rating are as follows:

(1) The Company’s dependence on the value and dividend policies of the Portfolio securities.
(2) Reliance on the Portfolio manager to generate additional income through methods such as capital gains and securities lending.
(3) 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 (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