Morningstar DBRS Finalizes Provisional Credit Rating of Pfd-3 (high) on Infrastructure Dividend Split Corp. Preferred Shares

DBRS Limited (Morningstar DBRS) finalized its provisional credit rating of Pfd-3 (high) assigned to the Preferred Shares issued by Infrastructure Dividend Split Corp. (the Company), managed by Middlefield Limited (the Manager). Middlefield Capital Corporation (the Advisor) will provide investment advice to the Company.

On May 4, 2024, the Company acquired the investment portfolio of International Clean Power Dividend Fund (CLP), a nonredeemable investment fund structured as a trust and managed by the Manager. In exchange for the assets of CLP, the Company issued approximately 5,212,245 Class A Shares at a price of $15.0 each that were distributed by CLP to its former unitholders and CLP was wound up and delisted from the TSX on May 7, 2024.

The Company completed an initial offering of $52,643,700 in gross proceeds by issuing 5,264,370 Preferred Shares at an issue price of $10.0 each. The Company intends that an equal number of Preferred Shares and Class A Shares will be outstanding at all material times. The term of the Preferred Shares is set for five years with the maturity date on April 30, 2029. The term of the Company may be extended beyond the maturity date for additional terms of up to five years each as determined by the Company's board of directors.

The investment strategy of the Company is to invest in an actively managed portfolio (the Portfolio) comprising approximately 15 dividend paying securities of issuers operating in the infrastructure sector. The Company will invest in issuers the Advisor believes are undervalued and well-positioned to benefit from the Advisor's outlook for a gradual reduction in interest rates, the continuation of global decarbonization, and favourable demographics (the Infrastructure Issuers). The Company is restricted from having for a period of more than 30 consecutive days: (1) less than 75% of the value of the total assets of the Company (excluding cash and cash equivalents) comprising the securities of Infrastructure Issuers, (2) more than 25% of the value of the total assets of the Company (excluding cash and cash equivalents) comprising securities of issuers having a market capitalization of less than $1 billion, and (3) more than 15% the value of the total assets of the Company (excluding cash and cash equivalents) comprising securities of issuers from countries that meet MSCI's definition of emerging market country. The Portfolio may include securities denominated in currencies other than the Canadian dollar, which may expose the Company to foreign exchange risk. However, the Company initially intends to hedge the majority of the exposure back to the Canadian dollar.

The Company intends to initially invest in a Portfolio consisting of equity securities from the following 15 investment-grade Infrastructure Issuers: Brookfield Infrastructure Corp, Brookfield Renewable Corp, Capital Power Corp, Crown Castle Inc, CT REIT, Enbridge Inc, Gibson Energy Inc, National Grid plc, NextEra Energy Inc, Northland Power Inc, SmartCentres, Southern Company, SSE plc, TC Energy Corp, and Union Pacific Corp.

The Preferred Shares will be entitled to fixed quarterly cumulative preferential cash distributions of $0.18, representing a 7.20% return on the issue price of $10.0. Holders of the Class A Shares will initially receive regular monthly noncumulative distributions of $0.125 with the corresponding annual return of 10.0% on the $15.0 issue price. No monthly distributions to the Class A Shares will be made if the dividends of the Preferred Shares are in arrears or the net asset value (NAV) of a unit (one Preferred Share and one Class A Share) falls below $15.0. The Company intends to increase or decrease from time to time, the targeted monthly distribution amount to the Class A Shares, to reflect any increase or decrease to the Company's available income.

Based on the initial asset coverage of 2.5x, the initial downside protection available to holders of the Preferred Shares is approximately 59% (after issuance fee and offering expenses). Downside protection available to the Preferred Shares consists of the NAV of the Class A Shares. The fixed distributions of dividends on the Preferred Shares will be funded from the dividends received on the securities in the Portfolio, which are expected to cover more than 1x the annual Preferred Shares distributions. The payment of regular monthly distributions to the holders of the Class A Shares, totalling $1.50 per annum, may reduce the downside protection over time. 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 4.9% 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 write covered call options on all or a portion of the shares held in the portfolio, engage in securities lending, and rely on realized capital gains.

Following the closing of the Offering, the Company will enter into a loan facility or prime brokerage facility (the Loan Facility) with one or more Canadian chartered banks. The Loan Facility will permit the Company to borrow an amount not exceeding 5% of the value of the total assets of the Company, which borrowing may be used only for working capital purposes. The Company may pledge the Portfolio securities as collateral for amounts borrowed under the loan facility. The Preferred Shares will be subordinated to any indebtedness under the Loan Facility.

The Company may issue an unlimited number of Preferred Shares, Class A Shares, and Class M Shares. The Preferred Shares rank in priority to the Class A Shares with respect to the payment of distributions and the repayment of capital on the dissolution, liquidation, or winding-up of the Company. The Class A Shares rank subsequent to the Preferred Shares, with respect to distributions and the repayment of capital on the dissolution, liquidation, or winding-up of the Company. The Class M Shares rank subsequent to both the Preferred Shares and the Class A Shares. There are 100 Class M Shares issued and outstanding at an issue price of $0.10 per share, and no additional Class M Shares can be issued until all the Class A Shares and Preferred Shares have been retracted, redeemed, or purchased for cancellation. The holders of the Class M Shares are not entitled to receive dividends.

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 and unpaid dividends.

The Pfd-3 (high) credit rating reflects (1) the level of downside protection available to holders of the Preferred Shares, (2) the initial Portfolio quality and underlying securities correlation, (3) the effect of stated distributions to the Class A Shares, and (4) term to maturity of the Preferred Shares.

The main constraints to the final credit rating are the following:

(1) The downside protection available to holders of the Preferred Shares will depend on the value of the securities held in the Portfolio.

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

(3) Reliance on the Manager to generate additional yield on the Portfolio to meet distributions and trust expenses, without having to liquidate portfolio securities.

(4) Stated monthly distributions on the Class A Shares, which will create a grind on the Portfolio mitigated by an asset coverage test of 1.5x, which ensures sufficient levels of downside protection to the holders of the Preferred Shares.

Morningstar DBRS' credit rating on the Preferred Shares addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the fixed cumulative preferential quarterly cash distributions and the return of the original issue price to holders of the Preferred Shares on the maturity date.

Morningstar DBRS' credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance 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.

The full report providing additional analytical detail is available by clicking on the link under Related Research below or by contacting us at info-DBRS@morningstar.com.

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 analyses 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.