DBRS Confirms Rating of Pfd-3 (high) on E Split Corp. Preferred Shares

DBRS Limited (DBRS) confirmed the rating of Pfd-3 (high) on the Preferred Shares issued by E Split Corp. (the Company). The Company invests in a portfolio primarily 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 Maturity Date is June 30, 2023. The term of the Company may be extended beyond the Maturity Date for additional terms of five years each as determined by the Company’s board of directors.

On May 2, 2019, the Company increased monthly cash distributions on the Class A Shares to $0.13 from $0.10, which corresponds to an annual yield of 10.4% on the $15.00 issuance price. The Preferred Shares receive fixed quarterly cumulative preferential cash distributions of $0.13125 (or $0.525 annually) per share, representing a yield of 5.25% per annum on the issue price of $10.00. 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 per unit is less than $15.00.

The Portfolio provides approximately 61% of downside protection to holders of the Preferred Shares as of May 8, 2019. The dividend coverage ratio is 2.3 times (x). Distributions to Class A Shares are anticipated to cause an average annual grind of 3.9% on the Portfolio until the end of the term. The Company has the ability to write covered call options or engage in security lending in order to generate additional income.

The confirmed rating of Pfd-3 (high) takes into consideration the level of downside protection, dividend coverage available to holders of the Preferred Shares, potential grind on the Portfolio arising from the targeted distributions to the Class A Shares and the expertise and strong presence of the Manager in the market.

The main constraints to the rating are as follows:

(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.

(5) Stated monthly distributions on the Class A Shares, which will create a grind on the Portfolio, are mitigated by an asset coverage test of 1.5x, which ensures sufficient levels of downside protection to the holders 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