DBRS Morningstar Confirms Life & Banc Split Corp. Preferred Shares Rating at Pfd-3

DBRS Limited (DBRS Morningstar) confirmed its rating on the Preferred Shares issued by Life & Banc Split Corp. (the Company) at Pfd-3. The Company invests in a portfolio of common shares (the Portfolio) issued by the six major banks in Canada (Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and The Toronto-Dominion Bank) and four Canadian life insurance companies (Great-West Lifeco Inc., iA Financial Corporation Inc., Manulife Financial Corporation, and Sun Life Financial Inc.). The Portfolio is approximately equally weighted and rebalanced at least annually. As of December 31, 2022, 58.4% of the Portfolio was invested in Canadian Banks and 42.3% in Canadian life insurance companies.

The maturity date is October 30, 2023. The board of directors may extend the maturity date by successive terms of up to five years, provided that shareholders are given an optional special retraction right at the end of each successive term.

Holders of the Preferred Shares are entitled to fixed cumulative quarterly dividends, offering a return of 5.45% per year on the original issue price of $10.00 per share. Holders of Class A Shares receive monthly distributions targeted at $0.10 per share. As protection to the holders of the Preferred Shares, an asset coverage test does not permit the Company to make monthly distributions to the Class A Shares if the dividends of the Preferred Shares are in arrears or if the net asset value (NAV) of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. In addition, the Company will not pay distributions in excess of $0.10 per month on the Class A Shares if, after payment of the distribution, the NAV per unit (one unit consists of one Preferred Share and one Class A Share) would be less than $25.00, unless the Company needs to make that distribution to fully recover refundable taxes.

As of January 31, 2023, the downside protection available to the Preferred Shares was 45.7%. The downside protection was on downward trend from March 2022 to October 2022 before picking up in November 2022. The dividend coverage ratio was about 1.2x, which is enough to cover for targeted distributions on the Preferred Shares but not Class A Shares. Without giving consideration to capital appreciation potential or any source of income other than the dividends earned by the Portfolio, the current distributions on the Class A Shares will create a projected grind on the NAV of the Portfolio of approximately 5.9% per year over the next year and 4.0% per year over the next five years. To supplement the Portfolio income, the Company may engage in covered call options and put option writing on all or a portion of the shares held in the Portfolio, engage in securities lending, and rely on realized capital gains.

Taking into consideration the credit quality and diversification of the Portfolio as well as the amount of downside protection available to the Preferred Shares and the expected grind in the Portfolio, DBRS Morningstar has confirmed the rating on the Preferred Shares at Pfd-3.

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 common shares held in the Portfolio. Current phase of high inflation and economic slowdown can continue to drive volatility, in prices and changes in the dividend policies, of the underlying issuers, which may result in significant reductions in the Preferred Shares dividend coverage or downside protection from time to time.

(2) Reliance on the manager to generate a high yield, through methods such as option writing, on the investment portfolio to meet distributions and other expenses without having to liquidate portfolio securities.

(3) The monthly cash distributions to holders of the Class A Shares that create grind on the Portfolio.

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 rating 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.