Press Release

DBRS Morningstar Confirms Canadian General Investments, Limited’s Preference Shares, Series 4 Rating at Pfd-1 (low)

Split Shares & Funds
February 06, 2023

DBRS Limited (DBRS Morningstar) confirmed its rating on the 3.75% Cumulative Redeemable Class A Preference Shares, Series 4 (the Preference Shares, Series 4) issued by Canadian General Investments, Limited (the Company) at Pfd-1 (low). The Preference Shares, Series 4 will be retractable at the option of their holders on or after June 15, 2023.

The Company’s portfolio (the Portfolio) is a well-diversified, actively managed portfolio of common shares, which currently includes 56 well-known names that operate in different sectors. As of January 27, 2023, the Portfolio was mainly allocated to the following sectors: industrials (20.9%), information technology (18.4%), materials (17.6%), consumer discretionary (11.9%), energy (11.3%), financials (11.2%), real estate (5.1%), communication services (2.3%), and healthcare (0.9%). The Portfolio holdings include primarily publicly listed Canadian equities with individual positions generally not exceeding 5% of the total Portfolio’s market value. Although the Company invests primarily in Canadian corporations (80.6%), it can also invest in U.S. corporations, exposing the Portfolio to foreign exchange risk. As of January 27, 2023, 19.4% of the Portfolio was denominated in U.S. dollars. However, the Company expects this exposure to not exceed 25% of the total Portfolio’s market value.

Holders of the Preference Shares, Series 4 currently receive fixed cumulative preferential cash dividends of $0.2344 per quarter yielding 3.75% per year on the initial issue price of $25.00. Holders of the common shares currently receive regular quarterly distributions of $0.23. Neither dividends shall be declared nor paid on the common shares nor shall any common shares be purchased for cancellation unless all dividends are current on the Class A Preference Shares. Furthermore, the Company cannot declare or pay any dividends to the common shares unless, after giving effect to such distribution, the Company's assets exceed 2.5 times (x) the Company's obligations as defined in the Prospectus.

In an effort to enhance returns to the common shareholders, the Company employs a leverage strategy that is achieved through the issuance of Class A Preference Shares and bank debt. The Company expects total leverage to not exceed 35% of the total Portfolio. In addition to the Preference Shares, Series 4, the Company has a margin borrowing facility through a prime brokerage service agreement with a Canadian chartered bank. Maximum utilization under this facility can go up to $100 million. This agreement requires the Company to pledge securities as collateral for margin borrowings. In addition, payments of outstanding amounts borrowed under this agreement take priority over distributions on the Class A Preference Shares.

As of January 26, 2023, the downside protection available to shareholders of the Preference Shares, Series 4 was approximately 86.3%. Regular distributions to the Company’s common shareholders, along with the Company’s operational expenses, are projected to cause a Portfolio grind of about 0.9% for the remaining term. The strong asset coverage of 7.3x provides enough cushion for the Preference Shares, Series 4 and is well above the level at which any distributions to common shareholders are suspended (2.5x).

The confirmation of the rating at Pfd-1 (low) is based on the amount of downside protection available, the Portfolio composition, and the Company’s overall performance metrics.

The main constraints on the rating are as follows:

(1) Market fluctuations resulting from high inflation, interest rate hikes, global supply chain issues, and an economic slowdown could further affect the Company’s net asset value. The downside protection available to holders of the Preference Shares, Series 4 depends on the market value of the underlying common shares held in the Portfolio.

(2) Volatility of price and changes in the dividend policies of the underlying issuers may result in significant reductions in the Preferred Shares, Series 4 dividend coverage or downside protection from time to time.

(3) Reliance on the manager to generate a sufficient yield on the investment portfolio to meet Preference Shares, Series 4 distributions and other expenses without having to liquidate portfolio securities.

(4) Unhedged foreign currency exposure.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

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

The principal methodology applicable to the ratings is Rating Canadian Split Share Companies and Trusts (June 22, 2022; https://www.dbrsmorningstar.com/research/398704).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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@dbrsmorningstar.com.

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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

Ratings

  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating