DBRS Morningstar Confirms Rating on Dividend Growth Split Corp. Preferred Shares at Pfd-3

DBRS Limited (DBRS Morningstar) confirmed the rating on the Preferred Shares issued by Dividend Growth Split Corp. (the Company) at Pfd-3. The redemption date for both classes of shares issued is September 27, 2024. The board of directors may extend the term of the Company and the shares by successive terms of up to five years, provided that shareholders are given an optional retraction right at the end of each successive term.

The Company holds a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio) issued by Canadian dividend-paying companies, each with a market capitalization greater than $2.0 billion. The Company may invest up to 20% of the Portfolio, from time to time, in global dividend growth companies. The Portfolio shall not include fewer than 15 investments. The Manager may rebalance and/or reconstitute the Portfolio more frequently than annually, at their discretion, so that the Company can respond to security or market developments on a timely basis.

Dividends received from the Portfolio are used to pay fixed cumulative quarterly dividends equal to $0.55 per annum (p.a.) to each Preferred Shareholder, yielding 5.5% on the original issue price of $10.00. Holders of Class A Shares receive monthly distributions targeted at $1.20 p.a. The net asset value (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.

The following treasury offerings of the Preferred Shares and the Class A Shares were completed by the Company over the last 12 months:

-- March 9, 2022: $67.0 million raised.
-- December 15, 2021: $76.4 million raised.
-- September 28, 2021: $60.2 million raised.
-- July 20, 2021: $62.4 million raised.

As of June 15, 2022, the downside protection available to the Preferred Shares was 37.9%. The downside protection has fully recovered from the decline incurred from March 2020 to February 2021. The dividend coverage ratio is approximately 0.79x. The rating confirmation of the Preferred Shares at Pfd-3 took into consideration the current downside protection level, the time remaining until maturity, and the minimum downside protection provided by the asset coverage test.

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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
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.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577