Morningstar DBRS Confirms Sustainable Power & Infrastructure Split Corp.’s Preferred Shares Credit Rating at Pfd-3

DBRS Limited (Morningstar DBRS) confirmed its credit rating on the Preferred Shares issued by Sustainable Power & Infrastructure Split Corp. (the Company) at Pfd-3. Brompton Funds Limited acts as the Manager of the Company. The Company invests in a portfolio of primarily dividend paying securities of power and infrastructure companies whose assets, products, and services the Manager believes are facilitating the multidecade transition toward decarbonization and environmental sustainability (the Portfolio). In addition, up to 25% of the Portfolio may be invested indirectly through exchange-traded funds, including funds managed by the Manager. The Portfolio is actively managed in accordance with the Company’s investment objectives, strategy, and restrictions. As of January 31, 2024, it consisted of 27 securities of companies operating in areas of industrials (30.6%), utilities (24.8%), energy (18.4%), materials (7.2%), communication services (6.9%), information technology (4.6%), consumer discretionary (2.6%), and one exchange-traded fund investment (4.8%).

As of January 31, 2024, 39.9% of the Portfolio was invested in the U.S., 20.0% in Canada, 5.7% in Japan, and the majority of the remaining was invested across Europe. The Portfolio is exposed to U.S. dollars, euros, Japanese yen, and Hong Kong dollars in addition to Canadian dollars, but this exposure is substantially hedged back to the Canadian dollar.

The Preferred Shares are scheduled to mature on May 29, 2026, subject to extension for successive terms of up to five years as determined by the Company’s board of directors. On maturity, the holders of the Preferred Shares will be entitled to the value of the Portfolio up to the face value of the Preferred Shares and any accrued but unpaid dividends in priority to the holders of the Class A Shares.

Holders of the Preferred Shares are entitled to receive a quarterly fixed cumulative dividend in the amount of $0.1250 per share to yield 5.00% per year on the original issue price of $10.00. Holders of the Class A Shares receive monthly noncumulative distributions targeted at $0.06667 per Class A Share to yield 8.00% per year on the original issue price of $10.00. 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.

As of February 29, 2024, the downside protection available to the Preferred Shares was 43.4% and the dividend coverage ratio was about 0.3x, indicating that the current dividend income earned by the Company is not enough to fully cover the Company’s expenses and targeted distributions on the Preferred Shares, which increases the reliance on the Manager to generate a high yield to meet distributions and other expenses without having to liquify portfolio securities. 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. Without giving consideration to capital appreciation potential or any source of income other than the dividends earned by the Portfolio, the Preferred Share distributions together with the current distributions on the Class A Shares will create a projected grind on the NAV of the Portfolio of approximately 6.7% per year for the remaining term of the Preferred Shares.

Taking into consideration the amount of downside protection available to the Preferred Shares, dividend coverage ratio, and the grind in the Portfolio, Morningstar DBRS has confirmed the credit rating on the Preferred Shares at Pfd-3.

The main constraints to the credit 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) A Preferred Shares’ dividend coverage that is less than one time.

(3) The Portfolio is well diversified and its exposure to foreign currency is substantially hedged.

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

(5) Stated monthly distributions on the Class A Shares, which can 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.

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
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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.