DBRS Confirms Rating of Dividend 15 Split Corp. II Preferred Shares at Pfd-3 (low)

DBRS Limited (DBRS) confirmed the rating of the Preferred Shares issued by Dividend 15 Split Corp. II (the Company) at Pfd-3 (low). The Company holds a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio), which are issued by the following 15 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 Corp. 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. The Company has the ability to write covered call options in respect of some or all of the common shares held in the Portfolio to generate additional income and supplement the dividends received on the Portfolio.

Dividends received from the Portfolio’s underlying common shares are used to pay fixed cumulative monthly cash distributions of $0.04375 per Preferred Share, yielding 5.25% annually on the original issue price of $10.00. Holders of the Class A Shares may receive regular monthly cash dividends targeted at $0.10 per Class A Share, yielding 8% per annum on the original issue price of $15.00. No monthly distributions to the Class A Shares are made if the dividends of the Preferred Shares are in arrears, or if the NAV of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions are made if the NAV of the Company is below $25.00. No distributions are currently made to holders of the Class A Shares.

As at April 30, 2019, the downside protection available to the Preferred Shares was 34%. The dividend coverage ratio was approximately 0.8x.

On February 21, 2019, the Company announced the extension of the term for an additional five years with a new termination date of December 1, 2024 (the Termination Date). The Company has the right to amend the rate of cumulative preferential monthly dividends to be paid to the Preferred Shares for the five-year renewal period, commencing December 1, 2019. The Company’s board of directors may extend the Termination Date for further terms of five years each. At maturity, the holders of the Preferred Shares will be entitled to the value of the Company up to the face amount of the Preferred Shares in priority to the holders of the Class A Shares. Holders of the Class A Shares will receive the remaining value of the Company.

The confirmation of the Pfd-3 (low) rating on the Preferred Shares is based on the current downside protection available and the minimum downside protection provided by an asset coverage test that does not permit any distribution to the holders of Class A Shares if the NAV of the Company falls below $15.00.

The main constraints on 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 Portfolio manager to generate additional income through methods such as option writing.

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