Morningstar DBRS Confirms Dividend 15 Split Corp.’s Preferred Shares Credit Rating at Pfd-3

DBRS Limited (Morningstar DBRS) confirmed its rating on the Preferred Shares issued by Dividend 15 Split Corp. (the Company) at Pfd-3. The Company invests in a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio), which are issued by the following 15 core companies: Bank of Montreal, The Bank of Nova Scotia, BCE Inc., CI Financial Corp., Canadian Imperial Bank of Commerce, Enbridge Inc., Manulife Financial Corporation, National Bank of Canada, Royal Bank of Canada, Sun Life Financial Inc., TELUS Corporation, Thomson Reuters Corporation, The Toronto-Dominion Bank, TransAlta Corporation, and TC Energy Corporation. The Company may also invest up to 15% of the net asset value (NAV) of the Portfolio in equity securities of Issuers other than the core 15 companies (it currently holds common shares from Suncor, Loblaws, Emera, AGF, and the TMX Group). As of November 30, 2023, core holdings weights stood at 78.0% and noncore holdings at 7.5%. The Portfolio is actively managed by Quadravest Capital Management (the Manager).

The Company’s termination date has been extended for a further five-year period from December 1, 2024, to December 1, 2029. At maturity, the holders of the Preferred Shares will be entitled to the value of the Company up to the face amount of the Preferred Shares in priority to the holders of the Class A Shares. Holders of the Class A Shares will receive the remaining value of the Company. The Company’s board of directors can extend the termination date for additional successive terms of five years, but shareholders are provided with a special retraction right in connection with such extension.

Dividends received from the Portfolio are used to pay the holders of the Preferred Shares fixed cumulative monthly dividends in the amount of $0.04583 per Preferred Share, yielding 5.5% per year on the issue price of $10.00. Holders of the Class A Shares receive regular monthly cash dividends targeted at $0.10 per Class A Share, yielding 8% per year on the original issue price of $15.00. No monthly distributions to the Class A Shares will be made if the dividends of the Preferred Shares are in arrears or if the Company’s NAV falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions can be made if the Company’s NAV per unit is below $25.00. (A unit consists of one Preferred Share and one Class A Share.)

The Company renewed its at-the-market equity program (ATM Program) that allows the Company to issue shares of the Company to the public from time to time at the Company’s discretion, effective until September 9, 2024, unless terminated prior to such date by the Company. The maximum gross proceeds from the issuance of the shares will be $400.0 million. During the period ended November 30, 2023, 15,036,300 Preferred Shares were sold through the ATM Program at an average selling price of $9.39 per Preferred Share, raising gross proceeds worth $141.2 million. During the same period, 15,578,200 Class A Shares were sold through the ATM Program at an average selling price of $7.54 per Class A Share, raising gross proceeds worth $117.4 million.

As of March 28, 2024, the amount of downside protection available to holders of the Preferred Shares is approximately 34.8% with a dividend coverage ratio of 1.0x, indicating that the current dividend income earned by the Company is covering the Company’s expenses and targeted distributions on the Preferred Shares. Without giving consideration to capital appreciation potential or any source of income other than the dividends earned by the Portfolio, the current distributions on the Class A Shares will create a projected grind on the NAV of the Portfolio of approximately 0.7% per year over the next five years. The grind in the portfolio is mitigated by a 1.5x NAV test. 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 amount of downside protection available to the Preferred Shares and the expected grind on the Portfolio, Morningstar DBRS has confirmed the rating on the Preferred Shares at Pfd-3.

Recent Updates/Treasury Offerings

(1) On May 25, 2023, the Company announced that the Toronto Stock Exchange (the TSX) has accepted its notice of intention to make a Normal Course Issuer Bid (the NCIB) to purchase its Preferred Shares and Class A Shares through the facilities of the TSX and/or alternative Canadian trading systems. The NCIB will commence on May 29, 2023, and terminate on May 28, 2024.

(2) On March 12, 2024, the Company announced it will extend the termination date of the Company for a further five-year period from December 1, 2024, to December 1, 2029.

(3) On April 1, 2024, the Company announced the renewal of its ATM Program that allows the Company to issue shares of the Company to the public from time to time at the Company’s discretion, effective until September 9, 2024, unless terminated prior to such date by the Company. The maximum gross proceeds from the issuance of the shares will be $400 million.

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

(3) The monthly cash distributions to holders of the Class A Shares will 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.