DBRS Morningstar Downgrades Rating on Prime Dividend Corp.’s Preferred Shares to Pfd-3

DBRS Limited (DBRS Morningstar) downgrades its rating on the Preferred Shares issued by Prime Dividend Corp. (the Company) to Pfd-3 from Pfd-3 (high). The Preferred Shares have experienced a considerable reduction in downside protection (from 47.5% in February 2022 to 34.9% in April 2023) as a result of the decline in the net asset value (NAV) of the portfolio in response to the broad stock market sell-off, which was triggered by the mix of the global high inflationary environment, tighter monetary policies, and various geopolitical events, such as the Russia-Ukraine war.

The Company holds a portfolio (the Portfolio) of common shares of the six major Canadian banks, life insurance companies (Great-West Lifeco Inc., Manulife Financial Corporation, and Sun Life Financial Inc.), investment management companies (AGF Management Limited, CI Financial Corp., and IGM Financial Inc.), and companies in other industries (BCE Inc., TransAlta Corporation, TC Energy Corporation, Power Corporation of Canada, and TMX Group Limited). The common shares of each company in the Portfolio generally represent between 4% and 8% of the Company’s total net asset value (NAV), and no more than 20% of the Company’s NAV may be invested in securities issued by financial services or utilities firms other than those listed above. There were no foreign currency investments in the Portfolio as of November 30, 2022. The Portfolio is actively managed by Quadravest Capital Management Inc.

Dividends received from the Portfolio are used to pay the Preferred Shares a monthly floating-rate distribution equal to the prevailing prime rate in Canada plus 2.35% per annum (p.a.) with a minimum of 5% p.a. and maximum of 8% p.a. based on the original issue price of $10. Holders of the Preferred Shares are currently receiving the monthly payment of $0.06667 per share (yielding 8% p.a.). The distribution rate to holders of the Class A shares is equal to 10% p.a. of the volume-weighted-average market price of the Class A shares over the last five trading days of the preceding month. The NAV test in place prevents any distributions to the Class A shares if the NAV per unit falls below $15. Distributions to the Class A shares were suspended in March 2023 as NAV dropped down below $15 per unit but were reinstated in April 2023.

As of April 28, 2023, the downside protection available to the Preferred Shares was 34.9%. The dividend coverage ratio was approximately 0.4 times (x). 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 3.9% over the next five years. 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.

The Preferred Shares will mature on December 1, 2023. In March 2023, the board of directors approved the extension of the Company’s term by another five years from December 1, 2023, to December 1, 2028. Any change to the Preferred Share dividend rate for the extended term will be based on market yields for preferred shares with similar terms at such time and will be announced no later than September 30, 2023.

Considering the amount of downside protection, the term extension, the projected grind on the portfolio, DBRS Morningstar downgrades the rating on the Preferred Shares to Pfd-3 from Pfd-3 (high).

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, economic slowdown, global supply chain disruptions, and Russian-Ukraine War.

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

(3) The Company relies on the Portfolio manager to generate additional income, through option writing, to meet distributions and other trust expenses without having to liquidate Portfolio securities.

(4) Stated monthly distributions on the Class A shares will likely create a grind on the Portfolio. This risk is mitigated by an asset coverage test of 1.5x that 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.