DBRS Limited (DBRS Morningstar) confirmed the rating of Pfd-3 (high) on the Preferred Shares issued by Big Pharma Split Corp. (the Company). The Company invests in a portfolio of approximately equally weighted common shares and securities (the Portfolio) convertible into or exchangeable for common shares (Equity Securities) of 10 issuers from the investable universe that must (1) be listed on a North American exchange, (2) pay a dividend, and (3) have sufficiently liquid options for their Equity Securities to permit the Portfolio Manager (i.e., Harvest Portfolio Group Inc.) to write options regarding such securities. The Portfolio Manager reconstitutes and rebalances the Portfolio at least semi-annually. No more than 20% of the net asset value (NAV) of the Company can be invested in securities other than from the 10 largest pharmaceutical issuers.
Holders of the Preferred Shares receive a quarterly fixed cumulative dividend in the amount of $0.125 per share to yield 5.00% per year on the issue price of $10.00. Holders of the Class A Shares receive regular monthly noncumulative distributions targeted to be $0.1031 per Class A Share to yield 8.25% per year on the issue price of $15.00. The Class A Share distributions are subject to the asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.00 or if the dividends of the Preferred Shares are in arrears.
As of August 31, 2022, the downside protection available to the Preferred Shares was 57.2%. Considering the main focus of the Portfolio is the pharmaceutical industry, the underlying share prices may be sensitive to the market and industry developments. The dividend coverage ratio was 0.4 times. Regular distributions to holders of the Class A Shares, along with the Company’s operational expenses, are projected to cause an average annual portfolio grind of about 6.6% in the remaining term. To supplement Portfolio income, the Portfolio Manager engages in call option writing.
On June 7, 2021, the Company announced the establishment of an at-the-market equity program (the ATM Program) that is effective until December 4, 2022. The ATM Program allows the Company to issue up to $75 million of each of the Preferred Shares and the Class A Shares to the public from time to time at the Company’s discretion. Under the ATM Program, 166,300 Class A Shares and 166,300 Preferred Shares were issued during the year ended December 31, 2021, raising gross proceeds of $2.3 million and $1.7 million, respectively.
The redemption date for both classes of shares is December 31, 2022. The Company’s board of directors may extend the term beyond the redemption date for additional terms of five years each. 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.
Considering the credit quality and diversification of the Portfolio, as well as the amount of downside protection available to the Preferred Shares and a consistent dividend-paying history of the underlying companies in the Portfolio, DBRS Morningstar confirmed the rating on the Preferred Shares at Pfd-3 (high).
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 Company’s NAV. 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.
(5) Potential foreign-exchange risk because the income received on the Portfolio is not hedged.
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.
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 firstname.lastname@example.org.
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.
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