Morningstar DBRS Finalizes Provisional Credit Rating of Pfd-2 on Partners Value Split Corp.'s Class AA Preferred Shares, Series 14

DBRS Limited (Morningstar DBRS) finalized its provisional credit rating of Pfd-2 on the Class AA Preferred Shares, Series 14 (the Series 14 Preferred Shares) issued by Partners Value Split Corp. (the Company). Morningstar DBRS also confirmed the credit ratings on the Class AA Preferred Shares, Series 8 (the Series 8 Preferred Shares); the Class AA Preferred Shares, Series 9; the Class AA Preferred Shares, Series 10; the Class AA Preferred Shares, Series 11; the Class AA Preferred Shares, Series 12; and the Class AA Preferred Shares, Series 13 (collectively, the Class AA Preferred Shares) at Pfd-2.

The Series 14 Preferred Shares will be entitled to a fixed quarterly cumulative preferential dividend of $0.34375 per share to yield 5.50% per annum on the issue price of $25.00. The maturity date for the Series 14 Preferred Shares will be June 30, 2030. Prior to the issuance of the Series 14 Preferred Shares, the Company will subdivide the existing Capital Shares, so that after the closing of the offering, the aggregate number of preferred shares (Class AA Preferred Shares and Junior Preferred Shares) outstanding and the aggregate number of Capital Shares outstanding will be equal. The net proceeds from the offering of Series 14 Preferred Shares will be used by the Company to redeem the outstanding Series 8 Preferred Shares on September 30, 2024, in accordance with their terms and to pay a special dividend on the Capital Shares.

The Company's investment objective is to hold a portfolio (the Portfolio) of Class A Limited Voting Shares of Brookfield Corporation (the BN Class A Shares; Brookfield Corporation has an Issuer Rating of "A" with a Stable trend and a credit rating on its Preferred Shares of Pfd-2 with a Stable trend by Morningstar DBRS). Brookfield Corporation was formerly known as Brookfield Asset Management Inc. (Brookfield). On December 9, 2022, Brookfield completed its public listing and distribution of a 25% interest in its asset management business, through Brookfield Asset Management Ltd. (BAM) by way of a plan of arrangement. As a result of this plan of arrangement, the Company received one Class A Limited Voting Share of BAM (the BAM Class A Shares, collectively with the BN Class A Shares, the Brookfield Shares) for every four BN Class A Shares it held. Currently, the Company holds 119,611,449 BN Class A Shares and 29,902,862 BAM Class A Shares. Dividends received from the Portfolio are used to fund the payment of dividends on the Class AA Preferred Shares and to fund the payment of interest on the debentures to the extent that any have been issued.

The Company has issued a limited number of Class A Voting Shares that rank senior to the Class AA Preferred Shares in respect of capital upon the dissolution, wind-up, or insolvency of the Company. There are currently 100 of such shares outstanding with a book value of USD 8,000.

Each series of Class AA Preferred Shares ranks pari passu with all other Class AA Preferred Shares and senior to:
-- the Class AAA Preferred Shares,
-- the Junior Preferred Shares, which currently consists of the Junior Preferred Shares, Series 1; the Junior Preferred Shares, Series 2; the Junior Preferred Shares, Series 3 and the Junior Preferred Shares, Series 4 and
-- the Capital Shares,
with respect to payment of dividends and repayment of principal.

There are currently no Class AAA Preferred Shares outstanding. The Junior Preferred Shareholders are entitled to receive quarterly noncumulative cash distributions at an annual rate of 5% when declared by the board of directors. There is $321 million worth of Junior Preferred Shares currently outstanding. The Company's Capital Shareholders will only receive excess dividend income after interest on the debentures, Class AA Preferred Share distributions, Junior Preferred Share distributions, and other Company expenses have been paid. Any capital appreciation of the Brookfield Shares will benefit the Capital Shareholders.

Following the issuance of the Series 14 Preferred Shares, the downside protection available to the Class AA Preferred Shares is expected to be approximately 91% and the dividend coverage ratio is expected to be approximately 2.7 times (x; based on the Canadian dollar and U.S. dollar exchange rate as of September 24, 2024). Because of the excess-only nature of both Junior Preferred Share and Capital Share dividends, there is no grind on the Portfolio. The Company receives dividends in U.S. dollars; consequently, there is risk that an appreciating Canadian dollar will cause the dividend coverage ratio to fall below 1.0x. In the event of a shortfall, the Company may sell some of the Portfolio's securities, engage in security lending, or write covered call options to generate sufficient income to satisfy its obligations to pay the Class AA Preferred Shares' dividends. If the Company chooses to lend its holdings, the Portfolio would be exposed to potential losses in the event that the borrower defaults on its obligations to return the borrowed securities.

The main constraints to the credit rating are the following:
-- The downside protection available to the Class AA Preferred Shareholders depends solely on the market value of the Brookfield Shares held in the Portfolio, which will fluctuate over time.
-- There is a lack of diversification, as the Portfolio is entirely made up of Brookfield Shares.
-- Changes in the dividend policy of Brookfield Corporation and BAM may result in reductions in the Class AA Preferred Shares' dividend coverage.
-- As the Brookfield Shares receive dividends in U.S. dollars, the Company is exposed to foreign currency risk relating to the Canadian-U.S. exchange rate, specifically the appreciation of the Canadian dollar versus the U.S. dollar. This may have a negative impact on the dividend coverage ratio of the Class AA Preferred Shares as these dividends are paid in Canadian dollars.
-- Downside protection available to the Class AA Preferred Shares may be negatively affected by the retraction of the Junior Preferred Shares.

Morningstar DBRS' credit rating on the Class AA 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 quarterly fixed cumulative preferential dividends and the return of principal on the maturity date in accordance with the terms for each Class AA Preferred Share.

Morningstar DBRS' credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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 21, 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 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.