Morningstar DBRS Confirms Credit Rating on Brompton Split Banc Corp.'s Preferred Shares at Pfd-3

DBRS Limited (Morningstar DBRS) confirmed its credit rating on the Preferred Shares issued by Brompton Split Banc Corp. (the Company) at Pfd-3. Brompton Funds Limited acts as the Manager of the Company. The Company invests in a portfolio of common shares (the Portfolio) issued by the six largest banks in Canada —Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank— and one exchange-traded fund (ETF), Brompton North American Financials Dividend ETF. Up to 10% of the Portfolio may be invested in global financial companies. The Portfolio portion allocated to the six largest banks in Canada remains approximately equally weighted.

Distributions on the Preferred Shares are made quarterly in the amount of $0.15625, yielding 6.25% annually on the original $10.00 issue price. Distributions on the Class A Shares are made monthly in the amount of $0.10 per share. No monthly distributions to the Class A Shares will be made if distributions to the Preferred Shares are in arrears or the net asset value (NAV) per unit (a unit means a notional unit consisting of one Preferred Share and one Class A Share) falls below $15.00.

All Preferred Shares and Class A Shares are scheduled to be redeemed by the Company on November 29, 2027, unless the term of the Company is extended. The board of directors may extend the term of the Company and the shares by successive terms of up to five years, provided that shareholders are given an optional retraction at the end of each successive term. On maturity, the holders of the Preferred Shares will be entitled to the value of the Company up to the face value 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.

As of July 16, 2024, the downside protection stood at 45.6% and the Preferred Shares' dividend coverage based on the current dividend yield on the Portfolio was approximately 1.3 times (x). Without giving consideration to the capital appreciation potential or any source of income other than the dividends earned by the Portfolio, the targeted monthly distributions to the Class A Shares are likely to create a grind on the Portfolio's NAV equivalent to 6.0% over the remaining term to maturity. To supplement the Portfolio income, the Company may write covered call options and covered put options on all or a portion of the common shares held in the Portfolio; engage in securities lending; and/or rely on realized capital gains.

Taking into consideration the amount of downside protection, the potential grind in the Portfolio's NAV, the dividend coverage and the minimum downside protection provided by the asset coverage test, Morningstar DBRS confirmed the credit rating on the Preferred Shares at Pfd-3.

The main constraints to the credit rating are the following:

(1) The downside protection available to holders of the Preferred Shares depends on the value of the common shares held in the Portfolio.

(2) 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.

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

(4) Stated monthly distributions on the Class A Shares will likely create a grind on the Portfolio's NAV. 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 factor(s) 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 (23 January 2024) https://dbrs.morningstar.com/research/427030.

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 (21 June 2024) https://dbrs.morningstar.com/research/434794.

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 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.