DBRS Morningstar Confirms Global Dividend Growth Split Corp.’s Preferred Shares at Pfd-3 (high)

DBRS Limited (DBRS Morningstar) confirmed the rating of Global Dividend Growth Split Corp.’s (the Company) Preferred Shares at Pfd-3 (high). The Company invests in a portfolio of equity securities of large capitalization global dividend growth companies (the Portfolio). As of December 31, 2021, the Portfolio was invested in equity securities from 11 different sectors, including information technology (19.8%), financials (18.4%), consumer discretionary (13.0%), industrials (11.0%), healthcare (10.9%), consumer staples (6.7%), materials (6.5%), energy (4.9%), real estate (4.4%), communication services (2.2%), and utilities (2.2%). To qualify for inclusion in the Portfolio, each global dividend growth company must have (1) a market capitalization of at least $10 billion and (2) a history of dividend growth or the potential for future dividend growth. The Portfolio is approximately equally weighted and is rebalanced and/or may be reconstituted at least annually. A portion of the Portfolio’s investments is denominated in currencies other than Canadian dollars. The foreign currency exposure is substantially hedged back to the Canadian dollar. In addition to, or instead of, investing directly in equity securities of global dividend growth companies, the Company may invest a portion of the Portfolio’s assets in exchange-traded funds that provide exposure to global dividend growth companies, including exchange-traded funds managed by Brompton Funds Limited (the Manager).

The Preferred Shares are schedule to mature on June 30, 2026, subject to extension for successive terms of up to five years as determined by the Company’s board of directors. On maturity, the holders of the Preferred Shares will be entitled to the value of the Portfolio up to the face value of the Preferred Shares and any accrued but unpaid dividends in priority to the holders of the Class A Shares.

Dividends received from the Portfolio are used to pay the fixed cumulative quarterly dividend to holders of the Preferred Shares in the amount of $0.125 per share to yield 5.00% per annum on the issue price of $10.00. The holders of the Capital A Shares receive regular monthly noncumulative distributions targeted to be $0.10 per Class A Share to yield 10.00% per annum on the issue price of $12.00. No monthly distributions to the Class A Shares will be made if (1) distributions to the Preferred Shares are in arrears or (2) in respect of a cash distribution, the net asset value of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares.

As of May 31, 2022, the downside protection available to the Preferred Shares was 49.6%, and the dividend coverage ratio was 0.3x. 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, together with the Preferred Shares’ dividend coverage shortfall, are likely to create a grind on the Portfolio’s net asset value equivalent to 7.4% per year on average over the remaining term to maturity. To supplement Portfolio income, the Company may engage in covered call option 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.

The Company has completed five overnight treasury offerings over the last 12 months, raising a total of $184.1 million in gross proceeds.

The confirmation of the Pfd-3 (high) rating is based on (1) the level of downside protection available to holders of the Preferred Shares, (2) the effect of stated distributions to the Class A Shares, (3) the quality and diversification of the underlying securities in the Portfolio, and (4) the remaining time to maturity.

The main constraints to the rating are the following:

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

(2) Volatility of price and changes in the dividend policies of the underlying issuers may result in significant reductions in the Preferred Shares dividend coverage or downside protection from time to time.

(3) Dividends and interest received on the Portfolio are currently unable to fully cover distributions on the Preferred Shares.

(4) Stated monthly distributions on the Class A Shares will likely create a grind on the Portfolio. This risk is mitigated by an asset coverage test of 1.5x that ensures sufficient levels of downside protection to the holders of the Preferred Shares.

(5) Reliance on the Manager to generate a high yield on the investment portfolio to meet distributions and other trust expenses without having to liquidate Portfolio securities.

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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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