Morningstar DBRS Confirms Brompton Lifeco Split Corp.’s Preferred Shares Credit Rating at Pfd-3 (low)

DBRS Limited (Morningstar DBRS) confirmed its credit rating on the Preferred Shares issued by Brompton Lifeco Split Corp. (the Company) at Pfd-3 (low). Brompton Funds Limited acts as the Manager of the Company. The Company holds a portfolio (the Portfolio) consisting of common shares of the four largest publicly traded Canadian life insurance companies: Great-West Lifeco Inc., Sun Life Financial Inc., Manulife Financial Corporation, and iA Financial Corporation Inc. The Portfolio is approximately equally weighted and is rebalanced at least annually.

In August 2023, the Company’s board of directors approved an extension of the Maturity Date (April 29, 2024) for the Class A and Preferred Shares for an additional five-year term to April 27, 2029. On maturity, the holders of the Preferred Shares are entitled to receive the value of the Company up to the face value of the Preferred Shares. Holders of the Class A Shares will receive the remaining value of the Company. The term of the Company may be extended further beyond the maturity date for additional terms of up to five years each, as determined by the Company’s board of directors.

The Preferred Shares are entitled to receive fixed cumulative quarterly distributions in the amount of $0.1750 per Preferred Share, yielding 7.0% annually on the original issue price of $10.00 per share, for the additional five-year term from April 30, 2024, to April 27, 2029. Holders of the Class A Shares receive regular monthly cash distributions targeted at $0.075 per share. No monthly distributions on the Class A Shares will be made if the Preferred Share distributions 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. Furthermore, no distributions in excess of $0.075 per month will be made if the NAV per unit is less than $25.00. (One unit consists of one Preferred Share and one Class A Share.)

As at March 14, 2024, the amount of downside protection available to the Preferred Shares was 42.4% with a dividend coverage ratio of 0.9x, indicating that the current dividend income earned by the Company is only marginally short of fully covering the Company’s expenses and targeted distributions on the Preferred Shares. This creates 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 3.3% per year for the remaining term to new maturity (April 27, 2029).

Taking into consideration the amount of downside protection, recent maturity extension, and the expected grind, Morningstar DBRS has confirmed the credit rating on the Preferred Shares at Pfd-3 (low).

Recent Updates/Treasury Offerings
(1) On August 10, 2023, the Company announced that the board of directors approved an extension of the Maturity Date for the Class A and Preferred Shares for an additional five-year term to April 27, 2029.

(2) On February 28, 2024, the Company announced that the distribution rate for the Preferred Shares for an additional five-year term from April 30, 2024, to April 27, 2029, will be $0.70 per Preferred Share per annum (7.0% on the par value of $10.00), payable quarterly.

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) The Company relies on the Portfolio manager to generate additional income through methods such as option writing and securities lending.

(3) The Portfolio carries a concentration risk of being focused in a single industry only.

(4) The monthly cash distributions to holders of the Class A Shares will likely create a grind on the Portfolio. This is 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, AND 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.