DBRS Assigns Provisional Rating of Pfd-3 (high) to E Split Corp. Preferred Shares

DBRS Limited (DBRS) assigned a provisional rating of Pfd-3 (high) to the Preferred Shares to be issued by E Split Corp. (the Company), which will be managed by Middlefield Limited (the Manager). Middlefield Capital Corporation will provide investment management advice to the Company. The Company will issue the Preferred Shares and Class A Shares at an issue price of $10.00 per Preferred Share and $15.00 per Class A Share. The Preferred Shares and Class A Shares will be issued on the basis that an equal number of Preferred Shares and Class A Shares will be outstanding at all times. Thus one Preferred Share and one Class A Share will comprise one unit (the Unit). The Maturity Date will be on June 30, 2023. The term of the Company may be extended beyond the redemption date for additional terms of five years each as determined by the Company’s board of directors.

The Preferred Shares will be entitled to fixed quarterly cumulative preferential cash distributions of $0.13125 (or $0.525 annually) per share, representing a 5.25% per-annum return on the issue price of $10.00. Holders of the Class A Shares will receive regular monthly non-cumulative distributions targeted to be $0.10 (or $1.20 annually) per Class A Share to yield 8.00% per annum on the issue price of $15.00. No distributions will be paid on the Class A Shares if (1) the distributions payable on the Preferred Shares are in arrears or (2) in respect of a cash distribution by the Company, the net asset value (NAV) per Unit is less than $15.00.

Net proceeds from the offering will be used to invest in a portfolio comprising common shares of Enbridge Inc. (rated BBB (high) with a Stable trend by DBRS; the Portfolio) in accordance with the Company’s investment objectives, strategy and restrictions. Up to 10% of the Portfolio may be invested in securities of any other issuer as determined by the Manager. The Company will not for a period of more than 30 consecutive days have less than 90% of the value of the total assets of the Company (excluding cash and cash equivalents) comprising common shares of Enbridge Inc.

A limited number of Class M Voting Shares (the Class M Shares) has been issued by the Company (although an unlimited amount is authorized to be issued). There are currently $100 worth of such shares outstanding, and they are owned by the Company. The Class M Shares are not entitled to receive any dividends for as long as any Preferred Shares or Class A Shares are outstanding.

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. In the event of liquidation, dissolution or winding-up of the Company, the Preferred Shares will rank prior to the Class A Shares and to the Class M Shares with respect to payment of distributions and repayment of capital. The Class A Shares will rank prior to the Class M Shares.

Holders of the Preferred Shares are expected to benefit from strong asset coverage of approximately 2.4 times. Based on the asset coverage, the NAV of the Company after the issuance would have to fall by approximately 58.1% for the holders of the Preferred Shares to be in a loss position. The Company has the ability to write covered call options or engage in security lending in order to generate additional income.

The provisional rating takes into consideration the expected level of downside protection, dividend coverage available to holders of the Preferred Shares, the potential grind on the Portfolio arising from the targeted distributions to the Class A Shares and the expertise and strong presence in the market of the Manager.

The main constraints to the provisional rating are the following:

(1) The downside protection available to holders of the Preferred Shares depends solely on the market value of the Enbridge Inc. common shares held in the Portfolio, which will fluctuate over time.

(2) There is a lack of diversification, as at least 90% of the Portfolio will entirely consist of Enbridge Inc. common shares.

(3) Changes in the dividend policy of Enbridge Inc. may result in reductions in the Preferred Shares dividend coverage and downside protection over time.

(4) Additional yield earned on the Portfolio to cover Class A Share distributions without having to liquidate Portfolio securities will depend on the Manager’s skill in generating supplementary income through methods such as option writing and securities lending.

A provisional rating is not a final rating and may change or be different than 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 principal methodology is Rating Canadian Split Share Companies and Trusts, which can be found on dbrs.com under Methodologies.

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 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.