Morningstar DBRS Confirms Credit Rating of Pfd-3 (high) on E Split Corp.’s Preferred Shares

DBRS Limited (Morningstar DBRS) confirmed the credit rating of Pfd-3 (high) on the Preferred Shares issued by E Split Corp. (the Company). The Company continues to invest in a portfolio primarily comprising common shares of Enbridge Inc. (the Portfolio) in accordance with the Company's investment objectives, strategy, and restrictions. The Company may invest up to 10.00% of the Portfolio in securities of any other issuer as determined by the Manager.

The Preferred Shares are scheduled to mature on June 30, 2028, 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.

The Preferred Shares receive fixed quarterly cumulative preferential cash distributions of $0.175 (or $0.70 annually) per share, representing a yield of 7.00% per year on the issue price of $10.00. The Class A Shares continue to receive cash distributions of $0.13 per share, corresponding to an annual yield of 10.4% on the $15.00 issuance price. No distributions will be paid on the Class A Shares if (1) the distributions payable on the Preferred Shares are in arrears or (2) in respect of a cash distribution by the Company, the net asset value per unit is less than $15.00.

The Company has a loan facility (the Loan Facility) for working capital purposes, with a maximum borrowed amount limited to 5% of the net asset value of the Company. The Loan Facility provides the lender with a security interest over the Portfolio. The Preferred Shares are subordinated to any indebtedness under the Loan Facility. As of December 31, 2023, the outstanding amount under the Loan Facility was nil.

As of May 28, 2024, the downside protection available to the Preferred Shares was approximately 53.9%. As of May 28, 2024, the asset coverage stood at 2.1 times (x) and the dividend coverage stood at 2.0x indicating that the current dividend income earned by the Company is high enough to fully cover the Company's expenses and targeted distributions on the Preferred Shares. On June 30, 2023, the Company terminated its securities lending agreement with RBC Investor Services Trust and exited the program. To further supplement the Portfolio income, the Company may engage in 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 current distributions on the Class A Shares will create a projected grind on the NAV of the Portfolio of approximately 5.0% per year over the next 5 years. However, the grind in the portfolio is mitigated by a 1.5x NAV test.

The confirmed rating of Pfd-3 (high) considers the level of downside protection, dividend coverage available to holders of the Preferred Shares, lack of diversification, and potential grind on the Portfolio arising from the targeted distributions to the Class A Shares.

Recent Updates/Treasury Offerings:

(1) June 13, 2023
The Company completed the overnight offering of Preferred Shares, raising $43.8 million in aggregate gross proceeds. The Preferred Shares were issued at a price of $10.00 per Preferred Share to yield 7.3% to maturity.

(2) June 27, 2023
The Company completed the overnight offering of Preferred Shares, raising $33.3 million in aggregate gross proceeds. The Preferred Shares were issued at a price of $10.00 per Preferred Share to yield 7.3% to maturity.

(3) September 15, 2023
The Company completed a treasury offering of Class A and Preferred Shares, raising $48.0 million in aggregate gross proceeds. The Preferred Shares were issued at a price of $9.85 per Preferred Share to yield 7.4% to maturity, and Class A Shares at a price of $12.65 per Class A Share to yield 12.3%.

(4) December 12, 2023
The Company completed a treasury offering of Class A and Preferred Shares, raising $38.6 million in aggregate gross proceeds. The Preferred Shares were issued at a price of $9.80 per Preferred Share to yield 7.5% to maturity, and Class A Shares at a price of $12.55 per Class A Share to yield 12.4%.

(5) April 19, 2024
The Company completed a treasury offering of Class A and Preferred Shares, raising $53.2 million in aggregate gross proceeds. The Preferred Shares were issued at a price of $10.10 per Preferred Share to yield 6.7% to maturity, and Class A Shares at a price of $11.60 per Class A Share to yield 13.4%.

The main constraints to the rating are as follows:

(1) There is a lack of diversification, as at least 90% of the Portfolio consists entirely of Enbridge Inc.'s common shares.

(2) Any volatility in dividend policy of Enbridge Inc will significantly impact the Preferred Shares' dividend coverage or downside protection over time.

(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, 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, 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.