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

DBRS Limited (DBRS) assigned a provisional rating of Pfd-2 (high) to the Cumulative Redeemable Series 2 Preferred Units (the Series 2 Preferred Units) to be issued by Canoe EIT Income Fund (the Fund) that will rank pari passu with the existing Cumulative Redeemable Series 1 Preferred Units (the Series 1 Preferred Units; collectively with the Series 2 Preferred Units, the Preferred Units). The Fund can issue an unlimited number of capital units (the Fund Units) and can also issue in series 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 2 Preferred Units are expected to be retractable at the option of the holders on or after March 15, 2025, based on the information provided by the Fund to DBRS to date. The Series 2 Preferred Units are expected to be issued at a price of $25.00 per Series 2 Preferred Unit and will be entitled to fixed quarterly cumulative preferential cash distributions of $0.30 (or $1.20 annually), as and when declared, representing a 4.80% per-annum return on the issue price of $25.00. Distributions on the Series 2 Preferred Units may be restricted as indicated below.

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 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.

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. Net proceeds from the offering of the Series 2 Preferred Units, after deducting the fees and expenses incurred as a result of the offering, are expected to be invested by the Fund in accordance with its investment objectives and investment strategies, subject to the investment restrictions. The Fund may engage in writing call and put options to generate additional income. To mitigate the currency exchange risk, the Fund may enter into foreign exchange contracts.

As of March 14, 2018, assuming no capital distributions or special dividends paid, the net asset value of the Fund would have to fall by approximately 81% for the holders of the Preferred Units to be in a loss position. The Series 1 Preferred Unit holders currently 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 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. The Series 1 Preferred Units are retractable for cash at the option of the holder on or after March 15, 2024.

In assigning the provisional rating, DBRS has considered the expected level of downside protection available to holders of the Series 2 Preferred Units and the composition and 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 because of 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. Because of the amount of the Credit Facility compared with 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 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.

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