DBRS Assigns Provisional Rating of Pfd-2 (high) to Canoe EIT Income Fund Cumulative Redeemable Series 1 Preferred Units

DBRS Limited (DBRS) has today assigned a provisional rating of Pfd-2 (high) to the Cumulative Redeemable Series 1 Preferred Units (the Series 1 Preferred Units) to be issued by Canoe EIT Income Fund (the Fund).

Canoe EIT Income Fund is a closed-end investment trust focused on a broad range of income-producing investments in various industries and geographic regions. The Fund can issue an unlimited number of capital units (Units) and can also issue in series preferred units (Preferred Units) up to a maximum aggregate amount equal to 25% of the Fund’s total assets after giving effect to the proposed offering of Preferred Units. The Series 1 Preferred Units are expected to be issued at a price of $25.00 per Series 1 Preferred Unit and will be entitled to fixed cumulative preferential cash distributions payable quarterly. The Series 1 Preferred Units are expected to be retractable at the option of the holder on or after March 15, 2024, based on the information provided by the Fund to DBRS to date. Distributions on the Series 1 Preferred Units may be restricted as indicated below.

The Fund has a credit facility (the Credit Facility) with a Tier 1 Canadian bank, but is restricted by its Declaration of Trust from borrowing in excess of 20% of the Fund’s total assets at the time of borrowing, after giving effect to the borrowing. The Credit Facility is secured by all of the Fund’s present and after-acquired personal property, undertaking and assets, and all proceeds thereof. Distributions on the Series 1 Preferred Units are restricted if a default or event of default occurs under the Credit Facility, or if the outstanding amount borrowed exceeds the available credit at any time.

Net proceeds from the offering of the Series 1 Preferred Units, after deducting the fees and expenses incurred as a result of the offering, are expected to be used by the Fund to grow its portfolio in accordance with its investment objectives and investment strategies. Assuming the maximum aggregate amount of Preferred Units is issued, income to be received on the portfolio, after servicing the Credit Facility, is expected to be able to cover approximately 1.0 times the fixed quarterly distributions to the holders of the Series 1 Preferred Units. Holders of the Series 1 Preferred Units are also expected to benefit from strong asset coverage of approximately 5.5 times. As of February 6, 2017, assuming no capital distributions or special dividends paid, the net asset value of the Fund would have to fall by approximately 82% for the holders of the Series 1 Preferred Units to be in a loss position. However, the Fund typically pays regular monthly distributions to the holders of Units totalling $1.20 per Unit (a 9.3% annual yield based on the net asset value of the fund as of February 6, 2017), which could reduce the downside protection over time.

In addition, up to 10% of the aggregate outstanding Units may be redeemed at the option of the Unit holders each year. If Unit holders choose to exercise their redemption rights, the downside protection available to the Series 1 Preferred Units could decrease further.

The risks relating to Unit distributions and redemptions are partially mitigated by restrictions on distributions, purchases and redemptions in the Fund’s Declaration of Trust, as the Fund cannot pay or declare payable any distribution amount to the Unit holders (other than amounts that are paid solely through the issuance of additional Units, which would not affect the downside protection, or annual redemption amounts at the option of the holders of Units as described above), purchase for cancellation or otherwise redeem the Units, unless and until the distribution entitlements of the Series 1 Preferred Units have been paid in full or moneys set aside for such payment.

The provisional rating assigned by DBRS is based on the expected level of downside protection available to holders of the Series 1 Preferred Units, the expected distribution coverage ratio and the diversification of the portfolio. In addition, DBRS has taken into account the potential grind on the portfolio arising from the distributions to the Units and redemption rights, the potential foreign exchange risk due to some investments in foreign currencies not being hedged, and the fact that the lenders under the Credit Facility have priority over the Fund’s assets up to the amount of credit outstanding. Due to the amount of the Credit Facility compared to the current total assets, DBRS does not consider the latter risk to be significant.

A provisional rating is not a final rating and may change or be different from the final rating assigned or may be discontinued altogether. The assignment of a final rating on the above-mentioned security is subject to receipt of all information and final documentation by DBRS that it deems necessary to finalize the rating.

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 (June 2016), 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.