DBRS Assigns a New Rating of Pfd-3 (high) to Big Pharma Split Corp. Preferred Shares

DBRS Limited (DBRS) assigned a new rating of Pfd-3 (high) to the Preferred Shares (the Preferred Shares) issued by Big Pharma Split Corp. (the Company). The Company completed an initial offering by issuing an equal number (1,360,000) of Preferred Shares at $10 each and Class A Shares (the Class A Shares) at $15 each. Holders of the Preferred Shares will be entitled to receive a quarterly fixed cumulative dividend in the amount of $0.125 per share to yield 5.00% per annum on the issue price of $10.00. Holders of the Class A Shares will receive regular monthly non-cumulative distributions targeted to be $0.1031 per Class A Share to yield 8.25% per annum on the issue price of $15.00. The Class A Share distributions are subject to the asset coverage test, which does not permit any distributions to holders of the Class A Shares if the net asset value (NAV) of the Company falls below $15.00 or if the dividends of the Preferred Shares are in arrears.

Net proceeds from the offering will be used to purchase a portfolio (the Portfolio) of equally weighted common shares and securities convertible into or exchangeable for common shares (Equity Securities) of ten issuers from the Investable Universe, which is defined as Equity Securities that (1) are listed on a North American exchange, (2) pay a dividend and (3) have options in respect of its Equity Securities that are sufficiently liquid to permit the Portfolio Manager (Harvest Portfolio Group Inc.) to write options in respect of such securities. The Portfolio Manager will select eight from the ten largest Pharmaceutical Issuers from the Investable Universe and the remaining two from the Investable Universe. The indicative Portfolio includes the following issuers: Johnson & Johnson; Pfizer Inc.; Merck & Co., Inc.; AbbVie Inc.; Amgen Inc.; Novo Nordisk A/S; Bristol-Myers Squibb Company; GlaxoSmithKline plc; Eli Lilly and Company; and AstraZeneca PLC. The Portfolio will be reconstituted and rebalanced at least semi-annually. No more than 20% of the NAV of the Company can be invested in securities of issuers other than of the ten largest Pharmaceutical Issuers.

Based on current asset coverage of 2.4 times (x), the net asset value of the Company would have to fall by approximately 57.5% for the holders of the Preferred Shares to be in a loss position. The initial dividend coverage ratio is 0.4x. To supplement Portfolio income, the manager will engage in call option writing.

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.
The credit quality of the Portfolio is strong, though it is concentrated in the health-care sector. Nevertheless, the underlying companies from the indicative Portfolio have a consistent dividend paying history. The Company’s NAV may be sensitive to volatility of prices of the Portfolio securities as well as changes in the dividend policies of the underlying companies and the health-care industry-specific risks. In assigning the Pfd-3 (high) rating, DBRS has taken into account (1) the level of downside protection available to holders of the Preferred Shares, (2) the Portfolio quality, (3) potential foreign-exchange risk because the income received on the Portfolio will not be hedged and (4) stated distributions to the Class A 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, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.