DBRS Morningstar Downgrades Rating on Canadian Banc Corp.’s Preferred Shares to Pfd-3 from Pfd-3 (high)

DBRS Limited (DBRS Morningstar) downgraded the rating on the Preferred Shares issued by Canadian Banc Corp. (the Company) to Pfd-3 from Pfd-3 (high). The Company invests in a portfolio of common shares (the Portfolio) issued by the six largest Canadian banks: 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. Each of the six banks generally represents no less than 5% and no more than 20% of the net asset value (NAV) of the Portfolio. In addition, up to 20% of the Portfolio’s NAV may be invested in equity securities of Canadian or foreign financial services corporations other than the banks listed above.

The maturity date is December 1, 2023. The term may be extended beyond the termination date for additional terms of five years each as determined by the Company’s board of directors.

The amount of downside protection available to the Preferred Shares as of November 30, 2021, was 56.7%. Dividends received from the Portfolio are used to pay holders of the Preferred Shares floating cumulative monthly dividends at a rate per annum equal to the prevailing prime rate in Canada plus 1.5%, with a minimum annual rate of 5% and a maximum annual rate of 8%. The Preferred Share dividend coverage ratio was approximately 1.2 times.

On November 15, 2021, the Company announced a 60% increase in monthly dividend distributions payable to holders of the Class A Shares with the first such payment commencing on December 10, 2021. The new targeted rate is 15% annually on the volume-weighted average market price of the Class A shares over the last three trading days of the preceding month (previously 10% annually).

DBRS Morningstar expects operating expenses and the increased monthly cash distributions to the holders of the Class A Shares to cause an average annual grind on the Portfolio’s NAV of approximately 8.0% until the end of the term. Consequently, the amount of projected downside protection is no longer supportive of the current rating of Pfd-3 (high) on the Preferred Shares. As a result, DBRS Morningstar has downgraded the rating on the Preferred Shares to Pfd-3 from Pfd-3 (high).

DBRS Morningstar also considered the following constraints to the rating:

(1) The reliance on the Portfolio manager to generate additional income through methods such as option writing.

(2) The monthly cash distributions to holders of the Class A Shares.

(3) The dependence of the downside protection available to holders of the Preferred Shares on the value of the underlying common shares, which are subject to share price volatility.

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 28, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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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