DBRS Morningstar Confirms Dividend 15 Split Corp.’s Preferred Shares at Pfd-3

DBRS Limited (DBRS Morningstar) confirmed the rating of the Preferred Shares issued by Dividend 15 Split Corp. (the Company) at Pfd-3. The Company invests in a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio), which are issued by the following 15 core companies: Bank of Montreal, Bank of Nova Scotia, BCE Inc., CI Financial Corp., Canadian Imperial Bank of Commerce, Enbridge Inc., Manulife Financial Corporation, National Bank of Canada, Royal Bank of Canada, Sun Life Financial Inc., TELUS Corporation, Thomson Reuters Corporation, The Toronto-Dominion Bank, TransAlta Corporation, and TC Energy Corp. Up to 15% of the net asset value (NAV) of the Portfolio may be invested in equity securities of issuers other than the companies listed above. The Portfolio is actively managed by Quadravest Capital Management Inc.

The Company established an at-the-market (ATM) equity program in October 2019, which has been renewed and is currently effective until August 6, 2022. The ATM equity program allows the Company to issue Preferred Shares and Class A Shares to the public from time to time at its discretion, through the Toronto Stock Exchange or any other marketplace in Canada where the shares are listed. The Company also issues Preferred Shares and Class A Shares from time to time through overnight offerings. Preferred Shares and Class A Shares are issued only on the basis that an equal number of Preferred Shares and Class A shares will be outstanding at all material times.

The Company’s termination date is December 1, 2024. At maturity, the holders of the Preferred Shares will be entitled to the value of the Company up to the face amount of the Preferred Shares in priority to the holders of the Class A Shares. Holders of the Class A Shares will receive the remaining value of the Company. The Company’s board of directors can extend the termination date for additional successive terms of five years, but shareholders are provided with a special retraction right in connection with such extension.

Dividends received from the Portfolio are used to pay the holders of the Preferred Shares fixed cumulative monthly dividends in the amount of $0.04583 per Preferred Share, yielding 5.5% per year on the issue price of $10.00. Holders of the Class A Shares receive regular monthly cash dividends targeted at $0.10 per Class A Share, yielding 8% per year on the original issue price of $15.00. No monthly distributions to the Class A Shares will be made if the dividends of the Preferred Shares are in arrears or if the Company’s NAV falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions can be made if the Company’s NAV per unit is below $25.00 (a unit consists of one Preferred Share and one Class A share).

Current downside protection available to holders of the Preferred Shares is approximately 43%. Downside protection available to the Preferred Shares consists of the Class A Shares’ NAV. The current Preferred Share dividend coverage ratio is approximately 0.9x. The average grind on the Portfolio is expected to be 5.3% annually for the next three years. The Company can write covered call options in respect of some or all of the common shares held in the Portfolio to generate additional income.

The rating confirmation considers the current level of downside protection available to the Preferred Shares, the dividend coverage ratio below 1.0x, the expected grind on the Portfolio arising from the current distributions to the Class A Shares, and the remaining term to maturity.

The main challenges are:

(1) The downside protection available to holders of the Preferred Shares depends on the value and dividend policies of the securities in the Portfolio.

(2) The Company relies on the Portfolio manager to generate additional income through methods such as option writing.

(3) The monthly cash distributions to holders of the Class A Shares will create a grind on the Portfolio. This is mitigated by an asset coverage test of 1.5x, which ensures sufficient levels of downside protection to the holders of the Preferred Shares.

There were no environmental, social, or governance (ESG) factors or considerations with a significant or relevant impact on the credit rating.

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
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Tel. +1 416 593-5577