DBRS Morningstar Confirms Brompton Lifeco Split Corp. Preferred Shares Rating at Pfd-3 (low)

DBRS Limited (DBRS Morningstar) confirmed its rating on the Preferred Shares issued by Brompton Lifeco Split Corp. (the Company) at Pfd-3 (low). The Company holds a portfolio (the Portfolio) consisting of common shares of the four largest publicly traded Canadian life insurance companies: Great-West Lifeco Inc., Sun Life Financial Inc, Manulife Financial Corporation, and iA Financial Corporation Inc. The Portfolio is approximately equally weighted and is rebalanced at least annually.

The maturity date is April 29, 2024. On maturity, the holders of the Preferred Shares are entitled to receive the value of the Company up to the face value of the Preferred Shares. Holders of the Class A Shares will receive the remaining value of the Company. The term of the Company may be extended further beyond the maturity date for additional terms of five years each, as determined by the Company’s board of directors.

The Preferred Shares are entitled to receive fixed cumulative, quarterly distributions in the amount of $0.15625 per preferred share, yielding 6.25% annually on the issue price of $10.00 per share. Holders of the Class A Shares receive regular monthly cash distributions targeted at $0.075 per share. No monthly distributions on the Class A Shares will be made if the Preferred Share distributions 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. Furthermore, no distributions in excess of $0.075 per month will be made if the NAV per unit is less than $25.00. (One unit consists of one Preferred Share and one Class A Share.)

As at April 28, 2022, the amount of downside protection available to the Preferred Shares was 33.4%. Downside protection corresponds to the percentage decline in market value of the Portfolio that must be experienced before the Preferred Shares would be in a loss position. The Preferred Share dividend coverage ratio was 0.9x.

The Preferred Share dividend coverage shortfall, together with the targeted distributions to the Class A Shares, will create a grind in the Portfolio. However, given that the current NAV per unit is close to $15, the grind may be low at 0.4% per year on average, if distributions to the Class A Shares are suspended in the near future. The Company has the ability to write covered-call options or cash-covered put options with respect to all or part of the common shares of the Portfolio and may also engage in securities lending to generate additional income to supplement the dividends received on the Portfolio.

Taking into consideration 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 (low).

The main challenges are as follows:

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

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

(3) The monthly cash distributions to holders of the Class A Shares will likely 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
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577