DBRS Morningstar Confirms Global Dividend Growth Split Corp.’s Preferred Shares at Pfd-3 (high)

DBRS Limited (DBRS Morningstar) confirmed the rating of Global Dividend Growth Split Corp.’s (the Company) Preferred Shares at Pfd-3 (high). The Company invests in a portfolio of equity securities of large capitalization global dividend growth companies (the Portfolio). As of March 31, 2023, the Portfolio was invested in 44 equity securities across 10 different sectors, including information technology (18.4%), financials (12.1%), consumer discretionary (12.0%), healthcare (11.9%), industrials (11.6%), energy (11.0%), consumer staples (7.8%), materials (6.4%), utilities (3.5%), and communication services (2.2%). To qualify for inclusion in the Portfolio, each global dividend growth company must have (1) a market capitalization of at least $10 billion and (2) a history of dividend growth or the potential for future dividend growth. The Portfolio is approximately equally weighted in terms of individual security weights and rebalanced and/or may be reconstituted at least annually.

As of March 31, 2023, 84.3% of the Portfolio’s investments were denominated in currencies other than Canadian dollars. The foreign currency exposure is substantially hedged back to the Canadian dollar. In addition to, or instead of, investing directly in equity securities of global dividend growth companies, the Company may invest a portion of the Portfolio’s assets in exchange-traded funds that provide exposure to global dividend growth companies, including exchange-traded funds managed by Brompton Funds Limited (the Manager).

The Preferred Shares are scheduled to mature on June 30, 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.

Dividends received from the Portfolio are used to pay the fixed cumulative quarterly dividend to holders of the Preferred Shares in the amount of $0.125 per share to yield 5.00% per annum on the issue price of $10.00. The holders of the Capital A Shares receive regular monthly noncumulative distributions targeted to be $0.10 per Class A Share to yield 10.00% per annum on the issue price of $12.00. No monthly distributions to the Class A Shares will be made if (1) distributions to the Preferred Shares are in arrears or (2) in respect of a cash distribution, the net asset value of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares.

As of March 31, 2023, the downside protection available to the Preferred Shares was 44.9%, and the dividend coverage ratio was 0.2x. Without giving consideration to 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 net asset value equivalent to 7.3% 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.

DBRS Morningstar notes the following announcements from the Company during the last 12 months.

(1) On February 25, 2023, the Company completed overnight offering of Class A and Preferred Shares raising $42.9 million in aggregate gross proceeds. Preferred Shares were issued at a price of $9.75 per share and Class A Shares at a price of $10.65.

(2) On April 14, 2023, the Company established its at-the-market equity program (ATM Program) under which the Company may from time to time, during the period that the Offering remains in effect, issue and sell Preferred Shares having an aggregate market value of up to $75,000,000 and Class A Shares having an aggregate market value of up to $75,000,000.

The confirmation of the Pfd-3 (high) rating is based on (1) the level of downside protection available to holders of the Preferred Shares, (2) the effect of stated distributions to the Class A Shares, (3) the quality and diversification of the underlying securities in the Portfolio, and (4) the remaining time to maturity.

The main constraints to the rating are the following:

(1) The downside protection available to holders of the Preferred Shares depends on the value and dividend policies of the securities in the Portfolio. Valuation is currently exposed to market fluctuations resulting from high inflation, the economic slowdown, global supply chain disruptions, and the Russian-Ukraine war. A diversified Portfolio contributes in mitigating the risks and volatility triggered by above events.

(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.