DBRS Morningstar Confirms Rating of Pfd-3 (high) on E Split Corp. Preferred Shares

DBRS Limited (DBRS Morningstar) confirmed the rating of Pfd-3 (high) on the Preferred Shares issued by E Split Corp. (the Company). The Company invests in a portfolio primarily comprising common shares of Enbridge Inc. (rated BBB (high) with a Stable trend by DBRS Morningstar) (the Portfolio) in accordance with the Company’s investment objectives, strategy, and restrictions. The Company may invest up to 10% of the Portfolio in securities of any other issuer as determined by the Manager. The Maturity Date is June 30, 2023. In February 2023, the company announced that the board of directors intends to approve an extension of the maturity date of the Company for an additional five-year term to June 30, 2028.

The Company has a loan facility or prime brokerage facility (the Loan Facility) for working capital purposes, with a maximum borrowed amount limited to 5% of the net asset value of the Company. The Loan Facility provides the lender with a security interest over the Portfolio. The Preferred Shares are subordinated to any indebtedness under the Loan Facility. As of June 30, 2022, the outstanding amount under the Loan Facility was nil.

The Preferred Shares receive fixed quarterly cumulative preferential cash distributions of $0.13125 (or $0.525 annually) per share, representing a yield of 5.25% per year on the issue price of $10.00. The Class A Shares currently receive cash distributions of $0.13 per share, corresponding to an annual yield of 10.4% on the $15.00 issuance price. No distributions will be paid on the Class A Shares if (1) the distributions payable on the Preferred Shares are in arrears or (2) in respect of a cash distribution by the Company, the net asset value per unit is less than $15.00.

As of February 28, 2023, the downside protection available to the Preferred Shares was approximately 57.4%. Distributions to the Preferred Shares are mainly funded through dividends earned on the Portfolio, which provide for a dividend coverage ratio of approximately 2.7 times (x). Distributions to the Class A Shares are anticipated to cause an average annual grind of 2.9% on the Portfolio until the end of the term and 3.5% on average over the next five years. In addition to dividends earned on the common shares held in the Portfolio, the Company may generate capital gains in the Portfolio. The Company may also engage in securities lending or covered call option writing to supplement income.

During the year ended December 31, 2022, the Company did not make any overnight offering issuances. However, the Company made the following announcements in recent months:

(1) On January 12, 2023
The Company may from time to time offer and issue preferred shares and Class A Shares in an aggregate offering amount of up to $1,000,000,000, at any time during the 25-month period.

(2) On February 3, 2023
The Company established its at-the-market equity program that allows the Company to issue shares of the Company to the public, effective until February 13, 2025, unless terminated prior to such date by the Company. The maximum gross proceeds from the issuance of the shares will be $200 million for each of the Class A and Preferred Shares.

The confirmed rating of Pfd-3 (high) considers the level of downside protection, dividend coverage available to holders of the Preferred Shares, lack of diversification, and potential grind on the Portfolio arising from the targeted distributions to the Class A Shares.

The main constraints to the rating are as follows:

(1) The downside protection available to holders of the Preferred Shares depends solely on the market value of the Enbridge Inc.’s common shares in the Portfolio, which is exposed to market fluctuations resulting from high inflation, interest rate hikes, economic slowdown, and global supply chain issues.

(2) There is a lack of diversification, as at least 90% of the Portfolio consists entirely of Enbridge Inc.’s common shares.

(3) Changes in the dividend policy of Enbridge Inc. may reduce the Preferred Shares’ dividend coverage and downside protection over time.

(4) Additional yield earned on the Portfolio to cover Class A Share distributions without having to liquidate Portfolio securities depends on the Manager’s skill in generating supplementary income through methods such as option writing and securities lending.

(5) Stated monthly distributions on the Class A Shares, which can create a grind on the Portfolio, are mitigated by an asset coverage test of 1.5x, which ensures sufficient levels of downside protection to the holders of the 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.