DBRS Morningstar Confirms Brompton Lifeco Split Corp.’s Preferred Shares Rating at Pfd-3 (low)

DBRS Limited (DBRS Morningstar) confirmed its rating on the Preferred Shares issued by Brompton Lifeco Split Corp. (the Company) at Pfd-3 (low). The Company holds a portfolio (the Portfolio) consisting of common shares of the four largest publicly traded Canadian life insurance companies: Great-West Lifeco Inc., Sun Life Financial Inc., Manulife Financial Corporation, and iA Financial Corporation Inc. The Portfolio is approximately equally weighted and is rebalanced at least annually.

The maturity date is April 29, 2024. On maturity, the holders of the Preferred Shares are entitled to receive the value of the Company up to the face value of the Preferred Shares. Holders of the Class A Shares will receive the remaining value of the Company. The term of the Company may be extended further beyond the maturity date for additional terms of up to five years each, as determined by the Company’s board of directors.

The Preferred Shares are entitled to receive fixed cumulative quarterly distributions in the amount of $0.15625 per Preferred Share, yielding 6.25% annually on the original issue price of $10.00 per share. Holders of the Class A Shares receive regular monthly cash distributions targeted at $0.075 per share. No monthly distributions on the Class A Shares will be made if the Preferred Share distributions 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. Furthermore, no distributions in excess of $0.075 per month will be made if the NAV per unit is less than $25.00. (One unit consists of one Preferred Share and one Class A Share.)

As at March 30, 2023, the amount of downside protection available to the Preferred Shares was 35.4% with a dividend coverage ratio of 1.1x. Downside protection corresponds to the percentage decline in market value of the Portfolio that must be experienced before the Preferred Shares would be in a loss position.

Without giving consideration to the 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 Shares are likely to create a grind on the Portfolio’s NAV equivalent to 3.6% per year over the remaining term to maturity. The Company has the ability to write covered call options or cash-covered put options with respect to all or part of the Portfolio’s common shares and may also engage in securities lending to generate additional income to supplement the dividends received on the Portfolio.

During the year ended December 31, 2022, pursuant to the annual retraction option, 64,700 Preferred Shares were retracted at $10.00 per share. However, there were two overnight offerings completed during the year with the following details:

(1) On January 13, 2022, the Company completed an overnight offering of Class A and Preferred Shares raising $40.5 million in aggregate gross proceeds. Preferred Shares were issued at a price of $10.05 per share, and Class A Shares were $6.95 per share.

(2) On April 6, 2022, the Company completed an overnight offering of Class A and Preferred Shares raising $30 million in aggregate gross proceeds. Preferred Shares were issued at a price of $10.05 per share, and Class A Shares were $6.70 per share.

Taking into consideration the amount of downside protection available to the Preferred Shares and the expected grind on the Portfolio, DBRS Morningstar has confirmed the rating on the Preferred Shares at Pfd-3 (low).

The main constraints to the rating are as follows:

(1) The downside protection available to holders of the Preferred Shares depends on the value and dividend policies 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) The Company relies on the Portfolio manager to generate additional income through methods such as option writing and securities lending.

(4) The monthly cash distributions to holders of the Class A Shares will likely create a grind on the Portfolio. This is 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 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.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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.