DBRS Finalizes Provisional Rating of Pfd-2 (low) on Global Resource Champions Split Corp. Class A Preferred Shares, Series 1

DBRS Limited (DBRS) has today finalized the provisional rating of Pfd-2 (low) assigned to the Class A Preferred Shares, Series 1 (the Preferred Shares) issued by Global Resource Champions Split Corp. (the Company). The Preferred Shares were issued to maintain the leveraged split share structure of the Company so that the number of issued and outstanding Capital Shares is equal to the number of issued and outstanding Preferred Shares. The Preferred Shares were offered at an issue price of $25.00 and are scheduled to mature on or about May 25, 2023.

The Company will invest the net proceeds in a portfolio (the Portfolio) of publicly listed securities of 15 large capitalization resource companies that will be approximately equally weighted on a U.S.-dollar-equivalent basis. The Company will have no obligation to rebalance the Portfolio thereafter. An indicative portfolio includes Agrium Inc., BHP Billiton PLC, BP PLC, Chevron Corporation, Enbridge Inc., Eni S.p.A., Exxon Mobil Corp, Kinder Morgan Inc./DE, Potash Corporation of Saskatchewan Inc., Rio Tinto PLC, Royal Dutch Shell PLC, Statoil ASA, Suncor Energy Inc., TOTAL SA, and TransCanada Corp. (collectively, the Portfolio Securities). Initially, a majority of the Portfolio is expected to be comprised of securities of U.S. dollar reporting issuers, and any exposure to currencies other than the U.S. dollar is expected to be hedged back to the U.S. dollar. Dividends received on the Portfolio securities denominated in currencies other than the U.S. dollar may (but are not required to) be hedged back to the U.S. dollar.

The dividends received from the Portfolio will be used to pay fixed cumulative quarterly distributions of $0.39 per Preferred Share to yield 6.25% per annum on the $25.00 issue price. The Capital Shares are expected to receive all excess dividend income, if any, after the Preferred Share distributions and other expenses of the Company have been paid, provided the net asset value (NAV) after giving effect to the distribution is greater than $36.00. The Company has the ability to write covered call options, cash covered put options or engage in securities lending in order to generate additional income. The Company will enter into a secured margin facility as of closing, and may also enter into a secured revolving credit facility at any time. To the extent the revolving credit facility or the margin facility are used, the maximum amount that can be borrowed pursuant a securities exemption order is equivalent to 5% of NAV, which partially mitigates the risk that these facilities will be secured by the Portfolio and will rank ahead of the Preferred Shares. Based on the initial dividend coverage ratio of approximately 1.3 times, the Company is not expected to require additional sources of income to fund its distributions.

The Portfolio is subject to a lien in favour of the Custodian and sub-custodians for payment of fees, charges and expenses owing by the Company to the Custodian. The Company also granted a security interest in the Portfolio to the hedge counterparty for the payment and performance of the Company’s obligations under the currency hedges. Each of these parties has a right of set-off under the terms of the Custodial Agreement and the hedge documents. DBRS will be notified of any defaults under these agreements by the Company, and will take rating action, as necessary.

Shareholders may surrender their Preferred Shares for retraction at any time. If the Company does not find a purchaser for the Preferred Shares tendered for retraction, the retracting holder may receive debentures (the Debentures), which each have a principal amount equal to $25.00 and will mature on or about May 25, 2023. The Debentures will rank senior to the Preferred Shares and Capital Shares with respect to the payment of interest and repayment of principal.

The initial downside protection available to the holders of the Preferred Shares is expected to be greater than 54% (after offering expenses). Downside protection available to the Pre¬ferred Shares consists of the NAV of the Capital Shares. Upon maturity, the holders of the Preferred Shares will be en¬titled to the value of the Portfolio Securities, up to the face value of the Preferred Shares, in priority to the holders of the Capital Shares (but behind any secured creditors and other senior indebtedness). The holders of the Capital Shares will be entitled to the distribu¬tion in the excess of dividend income on the Portfolio Securities beyond what is required to pay the holders of the Preferred Shares, as well as all capital appreciation.

The Pfd-2 (low) rating of the Preferred Shares is primarily based on the expected level of downside protection and dividend coverage available to holders of the Preferred Shares, as well as the credit quality and consistency of dividend distributions of the Portfolio holdings.

The main constraints to the rating are the following:

(1) The downside protection available to holders of the Preferred Shares is entirely dependent on the value of the shares in the Portfolio.

(2) The Company is not required to hedge dividend income back to the U.S. dollar.

(3) Volatility of price and changes in dividend policies of the underlying companies in the Portfolio may result in reductions in downside protection and dividend coverage from time to time.

(4) The Portfolio is concentrated in the resource sector.

(5) The security interest in favour of the custodian, hedge counterparty and margin facility lender, which rank prior to the Preferred Shares.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Canadian Split Share Companies and Trusts (July 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.