DBRS Morningstar Confirms Global Dividend Growth Split Corp.’s Preferred Shares at Pfd-3 (high)

DBRS Limited (DBRS Morningstar) confirmed the rating of Global Dividend Growth Split Corp.’s (the Company) Preferred Shares at Pfd-3 (high). The Company invests in a portfolio of equity securities of large capitalization global dividend growth companies (the Portfolio). Some of the major industries invested in are Information Technology (22.4%), Financials (17.9%), and Healthcare (12.9%). To qualify for inclusion in the Portfolio, each global dividend growth company must have (1) a market capitalization of at least $10 billion and (2) a history of dividend growth or the potential for future dividend growth. The Portfolio is approximately equally weighted and is rebalanced and/or may be reconstituted at least annually. A portion of the Portfolio’s investments is denominated in currencies other than Canadian dollars. The foreign currency exposure is substantially hedged back to the Canadian dollar. In addition to, or instead of, investing directly in equity securities of global dividend growth companies, the Company may invest a portion of the Portfolio’s assets in exchange-traded funds that provide exposure to global dividend growth companies, including exchange-traded funds managed by Brompton Funds Limited (the Manager). The term of the Company was extended for five years on November 24, 2020, and the new maturity date is June 30, 2026. The term may be extended beyond the maturity date for additional terms of five years each, as determined by the Company’s board of directors.

Dividends received from the Portfolio are used to pay the fixed cumulative quarterly dividend to holders of the Preferred Shares in the amount of $0.125 per share to yield 5.00% per annum on the issue price of $10.00. The distribution rate of the Preferred Shares for the new five-year term is unchanged. The holders of the Capital A Shares receive regular monthly noncumulative distributions targeted to be $0.10 per Class A Share to yield 10.00% per annum on the issue price of $12.00. No monthly distributions to the Class A Shares will be made if (1) distributions to the Preferred Shares are in arrears or (2) in respect of a cash distribution, the net asset value of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. Operating expenses and stated distributions to the Class A Shares are projected to create average annual grind on the Portfolio of approximately 7.9% until the end of the term.

As of June 3, 2021, the downside protection available to the Preferred Shares was approximately 54%. The Portfolio has experienced a 19% recovery since the reduction in value in March 2020. The dividend coverage ratio was 0.1x. To supplement Portfolio income, the Company can write covered call and put options or engage in security lending.

The Company has completed two overnight treasury offerings in the past year, raising a total of $29.4 million in gross proceeds.

The confirmation of the Pfd-3 (high) rating is based on (1) the level of downside protection available to holders of the Preferred Shares, (2) the effect of stated distributions to the Class A Shares, (3) the quality of underlying securities in the Portfolio, and (4) the remaining time to maturity.

The main constraints to the rating are the following:

(1) The downside protection available to holders of the Preferred Shares depends on the value of the equity 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 interest 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 additional yield on the Portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.
(5) Stated monthly distributions on the Class A Shares, which will create a grind on the Portfolio mitigated by an asset coverage test of 1.5x, ensures sufficient levels of downside protection to the holders of the Preferred Shares.
(6) 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 Company’s expected performance as a result of the global efforts to contain the coronavirus. The DBRS Morningstar sovereigns group initially published its outlook on the pandemic’s 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.

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