DBRS Morningstar Confirms Ratings of Pfd-2 (low) on Partners Value Split Corp.’s Class AA Preferred Shares

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Class AA Preferred Shares, Series 8; the Class AA Preferred Shares, Series 9; the Class A Preferred Shares, Series 10; the Class A Preferred Shares, Series 11; the Class AA Preferred Shares, Series 12; and the Class AA Preferred Shares, Series 13 (collectively, the Class AA Preferred Shares) issued by Partners Value Split Corp. (the Company) at Pfd-2 (low).

Previously, the Company’s portfolio (the Portfolio) consisted entirely of the Class A Limited Voting Shares of Brookfield Asset Management Inc. (Brookfield). However, in November 2022, Brookfield and Brookfield Asset Management Limited (BAM or the Manager) made an announcement regarding the public listing of the Manager and distribution of a 25% interest in Brookfield’s asset management business through the Manager. This transaction became effective on December 9, 2022, and resulted in the division of Brookfield into two publicly traded companies: (1) Brookfield Corporation (BN; rated A (low) with a Stable trend by DBRS Morningstar), which was previously named Brookfield Asset Management Inc.; and (2) Brookfield Asset Management Limited. As a result of this spinoff, Partners Value Split Corp. now holds shares of BN and BAM.

All series of Class AA Preferred Shares rank senior to the Capital Shares, the Class AAA Preferred Shares, and the Junior Preferred Shares, Series 1; the Junior Preferred Shares, Series 2; and the Junior Preferred Shares, Series 3 (collectively, the Junior Preferred Shares) and rank pari passu with all other Class AA Preferred Shares with respect to the payment of dividends and repayment of principal. Dividends from the Portfolio are used to fund the payment of interest on the debentures to the extent that any have been issued and to fund the payment of dividends on the Class AA Preferred Shares. Currently, there are no outstanding debentures in the Company.

Preferred shareholders of Class AA Preferred Shares are entitled to receive fixed cumulative dividends with a yield of 4.80%, 4.90%, 4.70%, 4.75%, 4.40%, and 4.45% on the issue price of $25 (listed in sequential order from Series 8 to Series 13). The Junior Preferred Shareholders are entitled to receive quarterly noncumulative cash distributions at an annual rate of 5% when declared by the board of directors. There is $295 million worth of Junior Preferred Shares currently outstanding. The Company’s Capital Shareholders will receive excess dividend income only after interest on the debentures, Class AA Preferred Share distributions, Junior Preferred Share distributions, and other Company expenses have been paid. Any capital appreciation of the BN and BAM shares will benefit the Capital Shareholders.

The Company has issued a limited number of Class A Voting Shares that rank senior to the Class AA Preferred Shares in respect of capital upon the Company’s dissolution, winding up, or insolvency. There are currently 100 of such shares outstanding with a book value of USD 8.00 each.

As of March 6, 2023, the asset coverage, downside protection, and dividend coverage stood at 7.4 times (x), 86.6%, and 2.6x, respectively. Because of the excess-only nature of both Junior Preferred Share and Capital Share dividends, there is no grind on the Portfolio. The Company receives dividends in U.S. dollars; consequently, there is risk that an appreciating Canadian dollar will cause the dividend coverage ratio to fall below 1.0x. In the event of a shortfall, the Company may sell some of the BN or BAM shares, engage in security lending, or write covered call options to generate sufficient income to satisfy its obligations to pay the Class AA Preferred Shares dividends. If the Company chooses to lend its holdings, the Portfolio would be exposed to the potential losses if the borrower defaults on its obligations to return the borrowed securities.

The main constraints to the ratings are the following:

(1) The downside protection available to the Class AA Preferred Shareholders depends solely on the market value of BN and BAM shares held in the Portfolio, which could fluctuate over time.

(2) There is a lack of diversification, as the Portfolio is entirely made up of BN and BAM shares.

(3) Changes in BN and BAM’s dividend policies may result in reductions in Class AA Preferred Shares dividend coverage.

(4) Downside protection available to the Class AA Preferred Shares may be negatively affected by the retraction of the Junior Preferred Shares.

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.