DBRS Confirms Dividend 15 Split Corp. Preferred Shares Rating at Pfd-3

DBRS Limited (DBRS) confirmed the rating of the Preferred Shares (the Preferred Shares) issued by Dividend 15 Split Corp. (the Company) at Pfd-3. The Company invests in a portfolio of common shares (the Portfolio) issued by the following 15 core companies: Bank of Montreal, Bank of Nova Scotia, BCE Inc., CI Financial Corp., Canadian Imperial Bank of Commerce, Enbridge Inc., Manulife Financial Corporation, National Bank of Canada, Royal Bank of Canada, Sun Life Financial Inc., TELUS Corporation, Thomson Reuters Corporation, The Toronto-Dominion Bank, TransAlta Corporation and TransCanada Corporation. In addition, up to 15% of the net asset value (NAV) of the Portfolio may be invested in equity securities of issuers other than the companies listed above. The Portfolio is actively managed by Quadravest Capital Management Inc. Each underlying company in the Portfolio listed above generally represents no less than 3.5% and no more than 8% of the NAV of the Company. The termination date for both classes of shares is December 1, 2019. The term of the Company may be extended beyond the termination date for additional terms of five years each as determined by the Company’s board of directors.

Dividends received from the Portfolio are used to pay the holders of the Preferred Shares fixed cumulative monthly dividends in the amount of $0.04375 per Preferred Share (yielding 5.25% annually). Holders of Class A Shares receive monthly cash distributions targeted to be $0.10 per Class A Share. The payment of the Class A Share distributions are projected to create an annual grind on the Portfolio NAV of approximately 5.14% until the end of the term. No monthly distributions to the Class A Shares will be made if the dividends of the Preferred Shares are in arrears or if the NAV of the Company falls below 1.5 times the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions will be made if the NAV of the Company is below $25. The Company has the ability to write covered call options or cash-covered put options with respect to all or part of the common shares of the Portfolio to generate additional income and supplement the dividends received on the Portfolio. The amount of downside protection available to the Preferred Shares as at May 15, 2018, was approximately 45.86%. The Preferred Share dividend coverage ratio was approximately 0.97 times.

Since the last review, the Company has completed two overnight offerings on August 24, 2017, and January 31, 2018, raising $87.4 million and $103.9 million in gross proceeds respectively. The total outstanding amount of the Preferred Shares and Class A Shares is currently 43,852,074 shares for each class. In addition, the Company is authorized to issue from time to time the Preferred Shares and the Class A Shares in an aggregate offering amount of up to $300 million at any time during the next 25 months, according to the latest short form prospectus dated June 1, 2018.

One particular strength of the Portfolio is the consistency of dividend distributions of the underlying companies to date. Potential areas of concern include the Portfolio’s concentration in the financial services and insurance industries. Volatility of prices and possible future changes in the dividend policies of the underlying companies in the Portfolio may result in reductions in downside protection and dividend coverage. Based on these considerations and the aforementioned performance metrics, DBRS confirms the Pfd-3 rating of Dividend 15 Split Corp.’s Preferred Shares.

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.

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