DBRS Morningstar Upgrades Prime Dividend Corp. Preferred Shares to Pfd-3 (high) from Pfd-3

DBRS Limited (DBRS Morningstar) upgraded the rating on the Preferred Shares issued by Prime Dividend Corp. (the Company) to Pfd-3 (high) from Pfd-3. 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, and Sun Life Financial Inc.), investment management companies (AGF Management Limited, CI Financial Corp., and IGM Financial Inc.), and companies in other industries (BCE Inc., TransAlta Corporation, TC Energy Corporation, Power Financial Corporation, and TMX Group Limited). The common shares of each company in the Portfolio 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. There were no foreign currency investments in the Portfolio as of November 30, 2020. 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 plus 2.35% per annum (p.a.) with a minimum of 5% p.a. and maximum of 8% p.a. based on the original issue price of $10. Holders of the Preferred Shares are currently receiving the monthly payment of $0.04167 per share (yielding 5.0% 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 of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares.

As of June 15, 2021, the downside protection available to the Preferred Shares was 44.8%. It has fully recovered within a year since the March 2020 market downturn. The dividend coverage ratio was approximately 0.8x. Payments to the Class A Shares, along with operational expenses and the shortfall in dividend coverage, could create an average annual portfolio grind of 5.1% in the next two years, assuming no capital gains and no supplement dividend income. To supplement dividend income, the Company engages in covered call option writing. The termination is December 1, 2023.

Considering the amount of downside protection, consistent dividend distributions on the underlying companies, dividend coverage, and the remaining time to maturity, DBRS Morningstar upgraded the rating on the Preferred Shares to Pfd-3 (high) from Pfd-3.

The main constraints to the rating are as follows:

(1) The reliance on the Portfolio manager to generate additional income through methods such as option writing.

(2) The monthly cash distributions to holders of the Class A Shares.

(3) Market fluctuations resulting from the response to the worldwide spread of the Coronavirus Disease (COVID-19) that could negatively affect the Company’s NAV.

The rating includes additional analysis of the Company’s expected performance as a result of the global efforts to contain the coronavirus. The DBRS Morningstar sovereigns group initially published its outlook on the pandemic’s impact on key economic indicators for the 2020–22 time frame on April 16, 2020. DBRS Morningstar last updated the macroeconomic scenarios on June 18, 2021, in its “Global Macroeconomic Scenarios – June 2021 Update” at https://www.dbrsmorningstar.com/research/380281.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Split Share Companies and Trusts (June 23, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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.dbrsmorningstar.com or contact us at [email protected].

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