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

DBRS Limited (DBRS) confirmed the rating of the Preferred Shares issued by Dividend Growth Split Corp. (the Company) at Pfd-3. The scheduled redemption date for both classes of shares issued is November 28, 2019. The board of directors may extend the term of the Company and the shares by successive terms of up to five years, provided that shareholders are given an optional retraction right at the end of each successive term.

As of June 30, 2018, the Company held a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio) issued by 20 Canadian dividend-paying companies, each with a market capitalization greater than $2.0 billion. On August 29, 2018, shareholders approved updates to the investment objectives and strategies of the Company. The following changes will take place:

(1) Expansion of the investable universe of high-quality dividend growth companies from which the Portfolio manager can select by expanding the financial metrics that may be used to analyze the Portfolio constituents, including forward-looking metrics;
(2) Investment of up to 20% of the Portfolio, from time to time, in global dividend growth companies; and
(3) Permission to the Manager to rebalance and/or reconstitute the Portfolio more frequently than annually, at its discretion, so that the Company could respond to security or market developments on a timely basis.

Dividends received from the Portfolio are used to pay fixed cumulative quarterly dividends equal to $0.525 per annum (p.a.) to each Preferred Shareholder. Holders of Class A Shares are expected to receive monthly distributions targeted at $1.20 p.a.

As of August 30, 2018, the downside protection available to the Preferred Shares was 35.4%. Over the course of the last six months, the downside protection has experienced some reduction. On the other hand, as a result of dividend increase on the underlying common shares, the dividend coverage ratio has increased to approximately 1.0 times. The confirmation of the rating of the Preferred Shares at Pfd-3 is based primarily on the current downside protection available and the minimum downside protection provided by an asset coverage test, which does not permit any distributions to holders of the Class A Shares if the net asset value of the Company falls below $15.00.

The main constraints to the rating are (1) the Company’s dependence on the value and dividend policies of the securities in the Portfolio and (2) the reliance on the manager to generate a high yield on the Portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

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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