DBRS Morningstar Confirms Sustainable Power & Infrastructure Split Corp.’s Preferred Shares Rating at Pfd-3

DBRS Limited (DBRS Morningstar) confirmed its rating on the Preferred Shares issued by Sustainable Power & Infrastructure Split Corp. (the Company) at Pfd-3. Brompton Funds Limited acts as the manager of the Company (the Manager). The Company invests in a portfolio of primarily dividend paying securities of power and infrastructure companies whose assets, products, and services the Manager believes are facilitating the multidecade transition toward decarbonization and environmental sustainability (the Portfolio). In addition, up to 25% of the Portfolio may be invested indirectly through exchange-traded funds, including funds managed by the Manager. The Portfolio is actively managed in accordance with the Company’s investment objectives, strategy, and restrictions. As of December 31, 2022, it consisted of 31 securities of companies operating in areas of industrials (28.7%), utilities (28.3%), energy (11.2%), communication services (9.8%), materials (6.6%), real estate (6.6%), and information technology (3.8%), and one exchange-traded fund investment (4.6%). A portion of the Portfolio’s investments is denominated in currencies other than Canadian dollars, but this exposure is substantially hedged back to the Canadian dollar.

The Preferred Shares are scheduled to mature on May 29, 2026, subject to extension for successive terms of up to five years as determined by the Company’s board of directors. 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.

Holders of the Preferred Shares are entitled to receive a quarterly fixed cumulative dividend in the amount of $0.1250 per share to yield 5.00% per year on the original issue price of $10.00. Holders of the Class A Shares receive monthly noncumulative distributions targeted at $0.06667 per Class A Share to yield 8.00% per year on the original issue price of $10.00. 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.

As of February 28, 2023, the downside protection available to the Preferred Shares was 39.5% and the dividend coverage ratio was about 0.4 times (x). Without giving consideration to capital appreciation potential or any source of income other than the dividends earned by the Portfolio, the current targeted monthly distributions to the Class A shareholders, together with the Preferred Shares dividend coverage shortfall, are likely to create a grind on the Portfolio’s NAV equivalent to 5.3% per year on average over the remaining term to maturity. To supplement Portfolio income, the Company may engage in covered call option 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.

The Company made the following key announcements in the past 12 months:

(1) On April 1, 2022

The Company may from time to time offer and issue Preferred Shares and Class A Shares in an aggregate offering amount of up to $300 million at any time during the 25-month period.

(2) On August 17, 2022

The company completed an overnight offering of Preferred Shares and Class A Shares, raising approximately $9.7 million in gross proceeds. The Preferred Shares were offered at a price of $10.00 per share to yield 5.2%, and the Class A Shares were offered at a price of $8.95 per share to yield 8.9%.

Taking into consideration 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 securities held in the Portfolio. In current times, valuation is exposed to market fluctuations resulting from high inflation, interest rate hikes, economic slowdown, and global supply chain issues.

(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) Dividends and interest received on the Portfolio are currently unable to fully cover distributions on the Preferred Shares.

(4) 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.

(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
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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