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

DBRS Limited (DBRS) has today confirmed the rating of Pfd-2 (low) on the Class A Preferred Shares, Series 1 (the Preferred Shares) issued by Global Resource Champions Split Corp. (the Company). On May 6, 2016, the Company issued 1.8 million Preferred Shares and an equal number of Capital Shares. The Preferred Shares were offered at an issue price of $25.00. Both classes of shares are scheduled to mature on or about May 25, 2023.

The net proceeds were invested in a portfolio (the Portfolio) of publicly listed securities of 15 large capitalization resource companies on an equally weighted, U.S.-dollar-equivalent basis. The Company has no obligation to rebalance the Portfolio. The Portfolio holdings include 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). 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 on the Portfolio are 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 receive 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. There is currently no grind on the Portfolio. 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. Currently, the dividend coverage ratio is 1.2 times.

The Company maintains a secured margin facility 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 to a securities exemption order is equivalent to 5% of NAV, which partially mitigates the risk represented by these facilities’ being secured by the Portfolio and ranking ahead of the Preferred Shares.

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. There were no debentures outstanding as of December 31, 2016.

The Portfolio provided approximately 59.6% of downside protection to holders of the Preferred Shares as of April 24, 2017. Upon maturity, the holders of the Preferred Shares will be entitled 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 confirmation of the Pfd-2 (low) rating of the Preferred Shares is based on the 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, who 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 principal methodology is Rating Canadian Split Share Companies and Trusts (June 2016), which can be found on dbrs.com under Methodologies.