DBRS Confirms Rating of Dividend Growth Split Corp. Preferred Shares at Pfd-3

DBRS has today confirmed the rating of the Preferred Shares of Dividend Growth Split Corp. (the Company) at Pfd-3. In December 2007, the Company issued approximately 1.5 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). The scheduled redemption date for both classes of shares issued is November 30, 2014.

The Company holds a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio) issued by 20 Canadian dividend-paying companies, each with a market capitalization greater than $2 billion. The Portfolio is rebalanced at least annually. Dividends received from the Portfolio are used to pay to each Preferred Share holder fixed cumulative quarterly dividends equal to 5.25% per annum. Holders of Class A Shares are expected to receive monthly distributions targeted at 8% per annum.

Since the rating was last confirmed in May 2011, following the completion of a merger of the Company with Brompton Equity Split Corp., the net asset value (NAV) of the Company has remained fairly stable, with downside protection fluctuating between 38% and 47%. The current downside protection (as of April 26, 2012) is approximately 42%. Based on the current yields of the underlying securities in the Portfolio, the dividend coverage ratio is approximately 1.43 times as of April 30, 2012, so the dividends received on the Portfolio fully cover the Preferred Share distributions.

Today’s rating confirmation of the Preferred Shares is based primarily on (1) the downside protection available to the holders of the Preferred Shares; (2) testing of NAV floors for targeted and special distributions; and (3) consistency of dividend distributions of the companies included in the Portfolio.

The main constraints to the rating are (1) the Company’s dependence on the value and dividend policies of the securities in the Portfolio and (2) the reliance on the manager to generate a high yield on the Portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Split Share Companies and Trusts, which can be found on our website under Methodologies.