DBRS Confirms Rating of Canoe EIT Income Fund Cumulative Redeemable Series 1 Preferred Units at Pfd-2 (high)

DBRS Limited (DBRS) confirmed the rating of Pfd-2 (high) on the Cumulative Redeemable Series 1 Preferred Units (the Series 1 Preferred Units) issued by Canoe EIT Income Fund (the Fund). The Fund is a closed-end, actively managed investment trust focused on a broad range of income-producing investments in various industries, currencies and geographic regions. As of June 30, 2017, The Fund’s portfolio (the Portfolio) was composed of approximately 60 securities. Some major industries the Fund invests in are: Financials (35.3%), Energy (19.5%), Industrials (9.3%), Utilities (8.9%) and Healthcare (8.1%).

The Series 1 Preferred Unit holders receive quarterly cumulative preferential cash distributions of $0.30 (or $1.20 annually), representing a 4.80% per-annum return on the issue price of $25.00. The holders of the Fund Units (the Units) currently receive targeted monthly cash distributions of $0.10, amounting to $1.20 per annum. In addition, up to 10% of the aggregate outstanding Units may be redeemed at the option of the Unit holders each calendar year on a date determined by the Fund. Approximately 10% of the outstanding Units were redeemed in 2017. The Series 1 Preferred Units are retractable for cash at the option of the holder on or after March 15, 2024.

As of February 28, 2018, the downside protection available to the Series 1 Preferred Units was approximately 87.9%. The Series 1 Preferred Unit distributions are mainly funded through income received from the income-generating securities in the Portfolio. The distribution coverage ratio was 0.8 times as at February 28, 2018. The Fund may also engage in writing covered call options to supplement the income. To mitigate the currency exchange risk, the Fund may enter into foreign exchange contracts.

The Fund has a credit facility (the Credit Facility) with a Tier 1 Canadian bank, but it 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 as well as 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.

Based on the level of downside protection, the distribution coverage ratio and diversification of the Portfolio, DBRS confirmed the rating of Pfd-2 (high) on the Series 1 Preferred Units issued by the Fund.

The main constraints to the rating are the following:

(1) The potential grind on the Portfolio arising from redemption rights and distributions to the Units.
(2) The foreign-exchange risk due to the absence of a hedge on some investments in foreign currencies.
(3) The priority of the lenders under the Credit Facility over the Fund’s assets up to the amount of credit outstanding.

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 under Related Documents or by contacting us at info@dbrs.com.

The principal methodology is Rating Canadian Split Share Companies and Trusts (July 2017), which can be found on dbrs.com under Methodologies.

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

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