DBRS Confirms Rating on Global Resource Champions Split Corp. Class A Preferred Shares, Series 1 at Pfd-2 (low)

DBRS Limited (DBRS) confirmed its rating of Pfd-2 (low) on the Class A Preferred Shares, Series 1 (the Preferred Shares) issued by Global Resource Champions Split Corp. (the Company). The Company’s portfolio (the Portfolio) includes publicly listed securities of 14 large capitalization resource companies on an initially equally weighted, U.S.-dollar-equivalent basis. Portfolio holdings include Exxon Mobil Corporation; Royal Dutch Shell plc; Suncor Energy Inc.; Eni S.p.A.; TransCanada Corporation; BHP Billiton; Rio Tinto; Chevron Corporation; Kinder Morgan, Inc.; Equinor ASA; Total S.A.; BP p.l.c.; Enbridge Inc.; and Nutrien Ltd. (collectively, the Portfolio Securities). The Company has no obligation to rebalance the Portfolio. Any exposure to currencies other than the U.S. dollar is expected to be hedged back to the U.S. dollar. Dividends received on the Portfolio Securities denominated in currencies other than the U.S. dollar may, but are not required to, be hedged back to the U.S. dollar.

The dividends received on the Portfolio are used to pay fixed cumulative quarterly distributions of $0.39 per Preferred Share to yield 6.25% per annum on the $25.00 issue price. The Capital Shares receive excess dividend income, if any, after the Preferred Share distributions and the Company’s other expenses have been paid, provided that the net asset value (NAV) is greater than $36.00 after giving effect to the distribution. There is currently no grind on the Portfolio. The Company has the ability to write covered call options, cash covered put options or engage in securities lending to generate additional income. Compared with the previous year, the dividend coverage ratio has increased to 1.7 times because of a dividend payout increase on the underlying common shares in the Portfolio. The Portfolio provided approximately 66% of downside protection to holders of the Preferred Shares as of April 26, 2019.

The Company maintains a secured margin facility and may also enter into a secured revolving credit facility at any time. To the extent that the revolving credit facility or the margin facility are used, the maximum amount that can be borrowed pursuant to a securities exemption order is equivalent to 5% of the NAV, which partially mitigates the risk of these facilities’ being secured by the Portfolio and ranking ahead of the Preferred Shares.

Shareholders may surrender their Preferred Shares for retraction at any time. If the Company does not find a purchaser for the Preferred Shares tendered for retraction, the retracting holder may receive debentures (the Debentures), which each have a principal amount equal to $25.00 and will mature on or about May 25, 2023. The Debentures will rank senior to the Preferred Shares and Capital Shares with respect to the payment of interest and repayment of principal. There were no debentures outstanding as of December 31, 2018. Both classes of shares are scheduled to mature on or about May 25, 2023.

The confirmation of the Pfd-2 (low) rating on the Preferred Shares is based on the level of downside protection and dividend coverage available to holders of the Preferred Shares as well as the Portfolio holdings’ credit quality and consistency of dividend distributions.

The main constraints to the rating are the following:

(1) The downside protection available to holders of the Preferred Shares is entirely dependent on the value of the shares in the Portfolio.

(2) The Company is not required to hedge dividend income back to the U.S. dollar.

(3) Volatility of price and changes in dividend policies for the underlying companies in the Portfolio may result in reduced downside protection and dividend coverage from time to time.

(4) The Portfolio is concentrated in the resource sector.

(5) The security interest in favour of the custodian, hedge counterparty and margin facility lender, which rank ahead of the 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 & Criteria.

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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada