Morningstar DBRS Confirms Life & Banc Split Corp. Preferred Shares Credit Rating at Pfd-3

DBRS Limited (Morningstar DBRS) confirmed its credit rating on the Preferred Shares issued by Life & Banc Split Corp. (the Company) at Pfd-3. The Company invests in a portfolio of common shares (the Portfolio) issued by the six major banks in Canada (Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and The Toronto-Dominion Bank) and four Canadian life insurance companies (Great-West Lifeco Inc., iA Financial Corporation Inc., Manulife Financial Corporation, and Sun Life Financial Inc.). The Portfolio is approximately equally weighted and rebalanced at least annually. As of December 31, 2023, 59.7% of the Portfolio was invested in Canadian banks and 39.1% in Canadian life insurance companies. Brompton Funds Limited is acting as the manager for the Company.

In April 2023, the board of directors approved an extension of the maturity date of the Preferred Shares and Class A Shares for an additional five-year term to October 30, 2028.

Holders of the Preferred Shares are entitled to fixed cumulative quarterly dividends offering a return of 7.25% per year, increased from the previous distribution rate of 5.45% per year, on the original issue price of $10.00 per share. Holders of the Class A Shares receive monthly distributions targeted at $0.10 per share. As protection to the holders of the Preferred Shares, an asset coverage test does not permit the Company to make monthly distributions to the Class A Shares if the dividends of the Preferred Shares are in arrears or if the net asset value (NAV) of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. In addition, the Company will not pay distributions in excess of $0.10 per month on the Class A Shares if, after payment of the distribution, the NAV per unit (one unit consists of one Preferred Share and one Class A Share) would be less than $25.00, unless the Company needs to make that distribution to fully recover refundable taxes.

As of February 1, 2024, the downside protection available to the Preferred Shares was 42.0% in comparison to 45.7% as of January 31, 2023. The average downside protection over the last 13 months stood at 42.1%. The dividend coverage ratio was about 0.9x, not fully covering the targeted distributions on the Preferred Shares. Without giving consideration to the potential for capital appreciation or any source of income other than the dividends earned by the Portfolio, the current Preferred Shares distribution together with the distributions on the Class A Shares will create a projected grind on the NAV of the Portfolio of approximately 3.7% per year for the remaining term of the Preferred Shares. To supplement the Portfolio income, the Company may engage in covered call options and put option writing on all or a portion of the shares held in the Portfolio; engage in securities lending; and/or rely on realized capital gains.

Taking into consideration the diversified Portfolio, the amount of downside protection available to the Preferred Shares, the recent term extension, and the expected grind in the Portfolio, Morningstar DBRS has confirmed the rating on the Preferred Shares at Pfd-3.

Recent Updates/Treasury Offerings:

(1) April 4, 2023
The Company’s board of directors approved an extension of the maturity date of the Class A Shares and Preferred Shares for an additional five-year term to October 30, 2028.

(2) August 28, 2023
The Company announced that the Preferred Shares distribution rate for the new five-year term until October 30, 2028, will be 7.25% per year, in comparison to the previous rate of 5.45% per year on the initial issue price of $10.00.

(3) October 31, 2023
The Company completed a treasury offering of Preferred Shares, raising $94.0 million in aggregate gross proceeds. Preferred Shares were issued at a price of $9.60 per Preferred Share.

(4) December 19, 2023
The Company completed a treasury offering of Class A Shares and Preferred Shares, raising $65.9 million in aggregate gross proceeds. Preferred Shares and Class A Shares were issued at a price of $9.80 and $7.80 per share, respectively.

(5) January 19, 2024
The Company renewed its at-the-market equity program (ATM Program) to issue Class A Shares and Preferred Shares to the public from time to time, at the Company’s discretion. The maximum gross proceeds from the issuance of the shares will be $75.0 million for each of the Class A Shares and Preferred Shares, and the Program will be effective until February 18, 2026, unless terminated prior to such date by the Company.

The main constraints to the rating are as follows:

(1) Volatility in stock prices along with changes in the dividend policies of the underlying issuers may result in significant reductions in the Preferred Shares’ dividend coverage or downside protection from time to time.

(2) Preferred Shares dividend coverage that is less than 1x.

(3) Reliance on the manager to generate a high yield, through methods such as option writing or securities lending, on the investment portfolio to meet distributions and other expenses without having to liquidate portfolio securities.

(4) The monthly cash distributions to holders of the Class A Shares that create grind on the Portfolio.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

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

The principal methodology applicable to the credit rating is Rating Canadian Split Share Companies and Trusts (June 16, 2023; https://dbrs.morningstar.com/research/415986).

Other methodologies referenced in this transaction are listed at the end of this press release.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

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

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/410863.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.