DBRS Morningstar Confirms Life & Banc Split Corp. Preferred Shares Rating at Pfd-3

DBRS Limited (DBRS Morningstar) confirmed its rating on the Preferred Shares issued by Life & Banc Split Corp. (the Company) at Pfd-3. The Company invests in a portfolio of common shares (the Portfolio) issued by the six major banks in Canada (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) and four Canadian life insurance companies (Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc., Manulife Financial Corporation, and Sun Life Financial Inc.). The Portfolio is approximately equally weighted and rebalanced at least annually. The maturity date is October 30, 2023. The board of directors may extend the maturity date by successive terms of up to five years, provided that shareholders are given an optional special retraction right at the end of each successive term.

Holders of the Preferred Shares are entitled to fixed cumulative quarterly dividends, offering a return of 5.45% per year on the original issue price of $10.00 per share. Holders of Class A Shares receive monthly distributions targeted at $0.10 per share. As protection to the holders of the Preferred Shares, an asset coverage test does not permit the Company to make monthly distributions to the Class A Shares if the dividends of the Preferred Shares 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. In addition, the Company will not pay distributions in excess of $0.10 per month on the Class A Shares if, after payment of the distribution, the NAV per unit (one unit consists of one Preferred Share and one Class A Share) would be less than $25.00, unless the Company needs to make that distribution to fully recover refundable taxes.

As of March 17, 2022, the downside protection available to the Preferred Shares was 52.2% and the dividend coverage ratio was about 1.2x. Without giving consideration to any source of income other than the dividends earned by the Portfolio, the current targeted monthly distributions to the Class A shareholders are expected to create a grind on the NAV of the Portfolio equivalent to 5.5% per year on average over the next two years. To supplement Portfolio income, the Company may engage in covered call options and put option writing on all or a portion of the shares held in the Portfolio, engage in securities lending, and rely on realized capital gains.

Taking into consideration the credit quality and diversification of the Portfolio as well as the amount of downside protection available to the Preferred Shares and the expected grind in the Portfolio, DBRS Morningstar has confirmed the rating on the Preferred Shares at Pfd-3.

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 portfolio manager to generate a high yield on the Portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577