DBRS Morningstar Confirms Rating on Prime Dividend Corp. Preferred Shares at Pfd-3 (high)

DBRS Limited (DBRS Morningstar) confirmed its rating on the Preferred Shares issued by Prime Dividend Corp. (the Company) at Pfd-3 (high). The Company holds a portfolio (the Portfolio) comprising common shares of the six major Canadian banks, life insurance companies (Great-West Lifeco Inc., Manulife Financial Corporation, and Sun Life Financial Inc.), investment management companies (AGF Management Limited, CI Financial Corp., and IGM Financial Inc.), and companies in other industries (BCE Inc., TransAlta Corporation, TC Energy Corporation, Power Corporation of Canada, and TMX Group Limited). The common shares of each company in the Portfolio generally represent between 4% and 8% of the Company’s total net asset value (NAV), and no more than 20% of the Company’s NAV may be invested in securities issued by financial services or utilities firms other than those listed above. There were no foreign currency investments in the Portfolio as of November 30, 2021. The Portfolio is actively managed by Quadravest Capital Management Inc.

Dividends received from the Portfolio are used to pay the Preferred Shares a monthly floating-rate distribution equal to the prevailing prime rate in Canada plus 2.35% per annum (p.a.) with a minimum of 5% p.a. and maximum of 8% p.a. based on the original issue price of $10. Holders of the Preferred Shares are currently receiving the monthly payment of $0.04625 per share (yielding 5.55% p.a.). The distribution rate to holders of the Class A Shares is equal to 10% p.a. of the volume-weighted-average market price of the Class A Shares over the last five trading days of the preceding month. The current NAV test in place prevents any distributions to the Class A Shares if the NAV 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 42.0%. The dividend coverage ratio was approximately 0.6x. Payments to the Class A Shares, along with the shortfall in dividend coverage, could create an average annual portfolio grind of 5.4% in the next two years, assuming no capital gains and no supplement dividend income. To supplement dividend income, the Company engages in covered call option writing. The termination date is December 1, 2023.

Considering the amount of downside protection, consistent dividend distributions on the underlying companies, dividend coverage, and the remaining time to maturity, DBRS Morningstar confirmed the rating on the Preferred Shares at Pfd-3 (high).

The main constraints to the rating are as follows:

(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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