Morningstar DBRS Confirms Global Dividend Growth Split Corp.’s Preferred Shares at Pfd-3 (high)

DBRS Limited (Morningstar DBRS) confirmed the credit rating of Global Dividend Growth Split Corp.'s (the Company) Preferred Shares at Pfd-3 (high). The Company invests in a portfolio of equity securities of large capitalization global dividend growth companies (the Portfolio). As of March 31, 2024, the Portfolio was invested in 39 equity securities across 10 different sectors, including financials (21.2%), information technology (20.2%), industrials (17.7%), healthcare (12.2%), consumer discretionary (7.1%), energy (6.9%), materials (4.6%), consumer staples (4.2%), communication services (2.4%), and real estate (2.2%). To qualify for inclusion in the Portfolio, each global dividend growth company must have (1) a market capitalization of at least $10 billion and (2) a history of dividend growth or the potential for future dividend growth. The Portfolio is approximately equally weighted in terms of individual security weights and may be rebalanced and/or reconstituted at least annually.

As of March 31, 2024, 86.9% of the Portfolio's investments were denominated in currencies other than Canadian dollars. The foreign currency exposure is substantially hedged back to the Canadian dollar. In addition to, or instead of, investing directly in equity securities of global dividend growth companies, the Company may invest a portion of the Portfolio's assets in exchange-traded funds that provide exposure to global dividend growth companies, including exchange-traded funds managed by Brompton Funds Limited (the Manager).

The Preferred Shares are scheduled to mature on June 30, 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.

Dividends received from the Portfolio are used to pay the fixed cumulative quarterly dividend to holders of the Preferred Shares in the amount of $0.125 per share to yield 5.00% per annum on the issue price of $10.00. The holders of the Capital A Shares receive regular monthly noncumulative distributions targeted to be $0.10 per Class A Share to yield 10.00% per annum on the issue price of $12.00. No monthly distributions to the Class A Shares will be made if (1) distributions to the Preferred Shares are in arrears or (2) in respect of a cash distribution, the net asset value (NAV) of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares.

As of May 14, 2024, the downside protection available to the Preferred Shares was 49.9%, whereas the dividend coverage ratio was 0.1x indicating that the current dividend income earned by the Company is not enough to fully cover the 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 liquidate portfolio securities. To supplement the Portfolio income, the Company may engage in securities lending or covered call and put options writing on all or a portion of the shares held in the Portfolio. 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 8.3% per year over the next five years. However, the grind in the portfolio is mitigated by a 1.5x NAV test.

The confirmation of the Pfd-3 (high) credit rating is based on (1) the level of downside protection available to holders of the Preferred Shares, (2) Preferred Shares' dividend coverage ratio, (3) the effect of stated distributions to the Class A Shares, (4) the quality and diversification of the underlying securities in the Portfolio, and (5) the remaining time to maturity.

The main constraints on the credit rating are the following:

(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) Dividends and interest received on the Portfolio are currently unable to fully cover distributions on the Preferred Shares.

(3) The Company relies on the Portfolio manager to generate additional income, through option writing, to meet distributions and other trust expenses without having to liquidate Portfolio securities.

(4) Stated monthly distributions on the Class A Shares will likely create a grind on the Portfolio. This risk is mitigated by an asset coverage test of 1.5x that 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.