DBRS Morningstar Upgrades Dividend Growth Split Corp. Preferred Shares to Pfd-3 from Pfd-4 (high)

DBRS Limited (DBRS) upgraded the rating on the Preferred Shares issued by Dividend Growth Split Corp. (the Company) to Pfd-3 from Pfd-4 (high). The redemption date for both classes of shares issued is September 27, 2024. The board of directors may extend the term of the Company and the shares by successive terms of up to five years, provided that shareholders are given an optional retraction right at the end of each successive term.

The Company holds a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio) issued by Canadian dividend-paying companies, each with a market capitalization greater than $2.0 billion. The Company may invest up to 20% of the Portfolio, from time to time, in global dividend growth companies. The Portfolio shall not include fewer than 15 investments. The Manager may rebalance and/or reconstitute the Portfolio more frequently than annually, at their discretion, so that the Company can respond to security or market developments on a timely basis.

Dividends received from the Portfolio are used to pay fixed cumulative quarterly dividends equal to $0.55 per annum (p.a.) to each Preferred Shareholder, yielding 5.5% on the original issue price of $10.00. Holders of Class A Shares receive monthly distributions targeted at $1.20 p.a. The net asset value (NAV) test in place prevents any distributions to the Class A Shares if the NAV of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares.

On June 1, 2021, the Company completed a treasury offering of the Preferred Shares and the Class A Shares raising approximately $34.8 million in gross proceeds.

As of June 17, 2021, the downside protection available to the Preferred Shares was 36.7%. The downside protection has fully recovered from the losses incurred in March 2020. The dividend coverage ratio is approximately 0.9x. The rating upgrade of the Preferred Shares to Pfd-3 took into consideration the current downside protection level, the time remaining until maturity, and the minimum downside protection provided by the asset coverage test.

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 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 June 18, 2021, in its “Global Macroeconomic Scenarios: June 2021 Update.” For details, see at https://www.dbrsmorningstar.com/research/380281.

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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