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

DBRS Limited (DBRS Morningstar) confirmed its rating of the Preferred Shares issued by Brompton Split Banc Corp. (the Company) at Pfd-3 (high). The Company invests in a portfolio of common shares (the Portfolio) issued by the six major banks in Canada—Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and The Toronto-Dominion Bank—and one exchange-traded fund (ETF), Brompton North American Financials Dividend ETF. Up to 10% of the Portfolio may be invested in global financial companies from time to time. The Portfolio portion allocated to the major banks remains approximately equally weighted.

Distributions on the Preferred Shares are made quarterly in the amount of $0.125, yielding 5.0% annually on the original $10.00 issue price. Distributions on the Class A Shares are made monthly in the amount of $0.10 per share. No monthly distributions to the Class A Shares will be made if distributions to the Preferred Shares are in arrears or the net asset value (NAV) of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions will be made if the NAV per unit (a notional unit consists of one Preferred Share and one Class A Share) of the Company is below $25.00. The Company has the ability to write covered call options or covered put options with respect to all or part of the common shares of the Portfolio, which it currently actively engages in to generate additional income. In addition, the Company may enter into Securities Lending Agreements in order to generate an alternative source of income.

The Company announced the following key developments in 2022:
-- The Company’s current maturity date is November 29, 2022. However, in March 2022, the Company announced that the board of directors approved an extension of the maturity date for an additional five-year term to November 29, 2027, and the distribution rate for the Preferred Shares for the extended term will be announced at least 60 days prior to the current maturity date and will be based on market yields for Preferred Shares with similar terms at that time.

-- On June 30, 2022, the Company established an at-the-market equity program (ATM Program) that will be effective until April 26, 2023. The ATM Program allows the Company to issue Class A Shares and Preferred Shares from time to time at the Company’s discretion, with maximum gross proceeds of $25 million for each type of share.

-- On August 25, 2022, the Company completed an overnight treasury offering, raising approximately $51 million in gross proceeds.

As of August 18, 2022, the downside protection available to the Preferred Shares was approximately 52.9%, with a dividend coverage of 1.6x.

The Preferred Shares rating confirmation at Pfd-3 (high) is based on the downside protection available, the strong dividend coverage, and the minimum downside protection provided by the asset coverage test.

The main constraints to the rating are the following:
(1) Market fluctuations resulting from high inflation, interest rate hikes, oil prices, and global supply chain issues could further affect the NAV of the Company. The downside protection available to holders of the Preferred Shares depends on the value of the common shares 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) 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.

(4) The concentration of the Portfolio in one industry.

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 22, 2022), 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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