DBRS Morningstar Confirms Ratings of Canoe EIT Income Fund Cumulative Redeemable Series 1 and Series 2 Preferred Units at Pfd-2 (high)

DBRS Limited (DBRS Morningstar) confirmed the ratings of the Cumulative Redeemable Series 1 Preferred Units (the Series 1 Preferred Units) and the Cumulative Redeemable Series 2 Preferred Units (the Series 2 Preferred Units; collectively with the Series 1 Preferred Units, the Preferred Units) issued by Canoe EIT Income Fund (the Fund) at Pfd-2 (high). The Fund is a closed-end, actively managed investment trust focused on a broad range of income-producing investments in various industries, currencies, and geographic regions. As of January 31, 2023, the Fund’s portfolio (the Portfolio) was mainly allocated to the following sectors: financials (26.5%), energy (19.7%), healthcare (18.0%), materials (15.8%), and industrials (13.6%). Investments in the consumer discretionary, real estate, communication services, and consumer staples, together with corporate bonds and cash, and net of liabilities, represented the remaining 6.4%. The Fund is exposed to foreign exchange risk as some of the securities held in the Portfolio are denominated in currencies other than the Canadian dollar. As of January 31, 2023, 39.9% of the total Portfolio was exposed to the U.S. dollar but was partially hedged with borrowings in the same currency. The Fund may enter into foreign exchange contracts to further mitigate currency exchange risk.

The Preferred Unit holders receive quarterly cumulative preferential cash distributions of $0.30 (or $1.20 annually), representing a 4.80% annual return on the issue price of $25.00. The distributions are mainly funded through income received from the income-generating securities in the Portfolio. The Fund may also engage in writing covered call options to supplement the income. The dividends earned on the Portfolio net of the expenses, provide approximately 2.0 times (x) coverage on the Preferred Units distributions.

The Fund may redeem all or, from time to time, any part of the Preferred Units at various prices after specific dates. The Series 1 Preferred Units are already redeemable at the option of the Fund, from March 15, 2022, and the Series 2 Preferred Units will be redeemable at the option of the Fund, beginning on March 15, 2023. As of January 31, 2023, none of the Preferred Units have been redeemed. The Preferred Units are retractable for cash at the option of the holder on or after March 15, 2024, for the Series 1 Preferred Units and on or after March 15, 2025, for the Series 2 Preferred Units.

Holders of the Fund Units (the Units) currently receive targeted monthly cash distributions of $0.10, amounting to $1.20 per year, which are expected to create an annual grind of 7.7% in the Portfolio, when considering only dividend income. In addition, up to 10% of the aggregate outstanding Units may be redeemed at the option of the Unit holders each calendar year on a date determined by the Fund. On December 9, 2022, 70,540 of the outstanding Units were redeemed for cash as part of the regular annual voluntary cash redemption option. The Fund did not purchase any Units in the open market during the year ended December 31, 2022.

The Fund has the ability to issue additional Units through an at-the-market equity program (ATM Program). The issuance of additional Units increases the level of downside protection available to the Preferred Unit holders. The ATM Program, established in July 2019, was renewed again on December 8, 2022, to issue Units of the Fund to the public, effective until January 7, 2025, unless terminated prior to such date by the Fund. The maximum gross proceeds from the issuance of the Units will be $625 million. In 2022, the Fund issued 13,835,800 Units for gross proceeds of $185 million.

As of February 7, 2023, the downside protection available to the Preferred Units was approximately 87.3%, marginally up from 87.0% a year ago. The asset coverage ratio was 7.9x.

On September 23, 2020, the Fund entered into a prime broker arrangement for its lending with a Tier 1 Bank (the Custodian). The Fund’s Declaration of Trust restricts it from borrowing more than 20% of the Fund’s total assets at the time of borrowing, after giving effect to the borrowing. Under the prime broker arrangement, the Fund has access to a margin facility (the Margin Facility) that permits the Fund to buy and sell securities on margin in Canadian and U.S. funds up to an aggregate borrowing amount not exceeding the value of the collateral Portfolio securities held by the Custodian. Borrowings under the Margin Facility are repayable on demand and secured by Portfolio securities of the Fund. Payment of outstanding amounts borrowed and any other indebtedness on the Fund’s Margin Facility take priority over distributions on the Preferred Units. Distributions on the Preferred Units are also restricted if a default or event of default occurs under the Margin Facility.

Based on the level of downside protection, the distribution coverage ratio and diversification of the Portfolio, DBRS Morningstar confirmed the ratings of Pfd-2 (high) on the Preferred Units issued by the Fund.

The main constraints to the ratings are the following:

1) The potential grind on the Portfolio arising from redemption rights and distributions to the Units.

2) The foreign-exchange risk as a result of no hedge on some investments in foreign currencies.

3) The priority of the amounts owed to the Custodian under the prime broker arrangement over the Fund’s assets up to the amount of credit outstanding.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) 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 (May 17, 2022).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology applicable to the ratings is Rating Canadian Split Share Companies and Trusts (June 22, 2022; https://www.dbrsmorningstar.com/research/398704).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.