DBRS Morningstar Confirms Dividend 15 Split Corp.’s Preferred Shares at Pfd-3

DBRS Limited (DBRS Morningstar) confirmed its rating on the Preferred Shares issued by Dividend 15 Split Corp. (the Company) at Pfd-3. The Company invests in a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio), which are issued by the following 15 core companies: Bank of Montreal, The Bank of Nova Scotia, BCE Inc., CI Financial Corp., Canadian Imperial Bank of Commerce, Enbridge Inc., Manulife Financial Corporation, National Bank of Canada, Royal Bank of Canada, Sun Life Financial Inc., TELUS Corporation, Thomson Reuters Corporation, The Toronto-Dominion Bank, TransAlta Corporation, and TC Energy Corporation. The Company may also invest up to 15% of the net asset value (NAV) of the Portfolio in equity securities of issuers other than the core 15 companies (it currently holds common shares from Suncor, Loblaws, Emera, AGF, and the TMX Group). The Portfolio is actively managed by Quadravest Capital Management Inc.

The Company’s termination date is December 1, 2024. At maturity, the holders of the Preferred Shares will be entitled to the value of the Company up to the face amount of the Preferred Shares in priority to the holders of the Class A Shares. Holders of the Class A Shares will receive the remaining value of the Company. The Company’s board of directors can extend the termination date for additional successive terms of five years, but shareholders are provided with a special retraction right in connection with such extension.

Dividends received from the Portfolio are used to pay the holders of the Preferred Shares fixed cumulative monthly dividends in the amount of $0.04583 per Preferred Share, yielding 5.5% per year on the issue price of $10.00. Holders of the Class A Shares receive regular monthly cash dividends targeted at $0.10 per Class A Share, yielding 8% per year on the original issue price of $15.00. No monthly distributions to the Class A Shares will be made if the dividends of the Preferred Shares are in arrears or if the Company’s NAV falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions can be made if the Company’s NAV per unit is below $25.00 (a unit consists of one Preferred Share and one Class A Share).

As of March 31, 2023, the amount of downside protection available to holders of the Preferred Shares is approximately 34.9% with a dividend coverage ratio of 1.0x. 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 2.1% per year over the remaining term to maturity. The Company can write covered call options in respect of some or all of the Portfolio’s common shares to generate additional income to supplement the dividends received on the Portfolio.

On account of both overnight offering and the at-the-market program (the ATM Program), the Company issued more units throughout 2022 and, as a result, the number of units increased to 105,298,790 in 2022 from 91,089,552 in 2021. Key announcements regarding the same are as follows:

(1) On May 25, 2022, the Company received acceptance of a normal-course issuer bid commencing on May 27, 2022, and terminating on May 26, 2023, to purchase, from time to time, up to 9,539,322 Preferred Shares and 9,584,736 Class A Shares of the Company, representing 10% of the public float.

(2) On August 9, 2022, the Company renewed its ATM Program that allows the Company to issue shares of the Company to the public, effective until September 9, 2024, unless terminated prior to such date by the Company. The maximum gross proceeds from the issuance of the shares will be $400 million.

(3) On September 20, 2022, the Company completed an overnight offering of Class A and Preferred Shares raising $61.8 million in aggregate gross proceeds. Preferred Shares were issued at a price of $9.65 per share, and Class A Shares were issued at a price of $7.75 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.

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 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) The Company relies on the Portfolio manager to generate additional income through methods such as option writing and securities lending.

(3) The monthly cash distributions to holders of the Class A Shares will 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.