DBRS Confirms Prime Dividend Corp. Preferred Shares at Pfd-3 (high)

DBRS Limited (DBRS) confirmed the rating on the Preferred Shares issued by Prime Dividend Corp. (the Company) at Pfd-3 (high). The Company holds a portfolio (the Portfolio) comprising common shares of the six major Canadian banks, life insurance companies (Great-West Lifeco Inc., Manulife Financial Corporation, Sun Life Financial Inc.), investment management companies (AGF Management Limited, CI Financial Corp., IGM Financial Inc.) and companies in other industries (BCE Inc., TransAlta Corporation, TransCanada Corporation, Power Financial Corporation, TMX Group Limited). The common shares of each company in the Portfolio currently represent between 1% and 10% of the Company’s total net asset value (NAV) and no more than 20% of the Company’s NAV may be invested in securities issued by financial services or utilities firms other than those listed above. The Portfolio turnover rate was 11.5% for 2017. There were no foreign currency investments in the Portfolio as of November 30, 2017. The Portfolio is actively managed by Quadravest Capital Management Inc.

Dividends received from the Portfolio are used to pay the Preferred Shares a monthly floating-rate distribution equal to the prevailing prime rate in Canada (the Prime Rate) plus 0.75% per annum (p.a.) with a minimum of 5% p.a. and maximum of 7% p.a. based on the original issue price of $10. Holders of the Preferred Shares are currently receiving the minimum monthly payment of $0.04167 per share (yielding 5% p.a.). The distribution rate to holders of the Class A Shares is equal to 10% p.a. of the volume-weighted average market price of the Class A Shares over the last five trading days of the preceding month. The current NAV test in place prevents any distributions to the Class A Shares if the NAV falls below $15. The redemption date for both classes of shares is December 1, 2018.

As of May 31, 2018, the downside protection available to the Preferred Shares was 39.4%. The dividend coverage ratio increased to approximately 0.7 times, indicating the consistency of the dividend payments of the underlying companies in the Portfolio. Payments to the Class A Shares, along with operational expenses, are expected to create an average annual portfolio grind of 2.7% in the next six months. To supplement dividend income, the Company engages in covered call option writing which may affect the Portfolio turnover rate.

Considering the amount of downside protection and its behaviour and time remaining until maturity, DBRS confirms the rating of the Company’s Preferred Shares at Pfd-3 (high).

DBRS will continue to monitor changes in the credit quality of the Preferred Shares and provide rating updates as required.

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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