Morningstar DBRS Upgrades Brompton Lifeco Split Corp.'s Preferred Shares Credit Rating to Pfd-3

DBRS Limited (Morningstar DBRS) upgraded its credit rating on the Preferred Shares issued by Brompton Lifeco Split Corp. (the Company) to Pfd-3. Brompton Funds Limited acts as the Manager of the Company. The Company holds a portfolio (the Portfolio) consisting of common shares of the four largest publicly traded Canadian life insurance companies: Great-West Lifeco Inc., Sun Life Financial Inc., Manulife Financial Corporation, and iA Financial Corporation Inc. The Portfolio is approximately equally weighted and is rebalanced at least annually.

In August 2023, the Company's board of directors approved an extension of the Maturity Date (April 29, 2024) for the Class A and Preferred Shares for an additional five-year term to April 27, 2029. On maturity, the holders of the Preferred Shares are entitled to receive the value of the Company up to the face value of the Preferred Shares. Holders of the Class A Shares will receive the remaining value of the Company. The board of directors may extend the maturity date by successive terms of up to five years, provided that shareholders are given an optional special retraction right at the end of each successive term.

The Preferred Shares are entitled to receive fixed cumulative quarterly distributions in the amount of $0.175 per Preferred Share, yielding 7.0% annually on the original issue price of $10.0 per share, for the additional five-year term from April 30, 2024, to April 27, 2029. Holders of the Class A Shares receive regular monthly cash distributions targeted at $0.075 per share. No monthly distributions on the Class A Shares will be made if the Preferred Share distributions are in arrears or if the net asset value (NAV) of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. Furthermore, no distributions in excess of $0.075 per month will be made if the NAV per unit is less than $25.0. (One unit consists of one Preferred Share and one Class A Share.)

On December 17, 2024, the Company completed a stock split of its Class A Shares (the Share Split) that was executed as a result of the Company's strong performance. Class A shareholders of record at the close of business on December 17, 2024, received 14 additional Class A Shares for every 100 Class A Shares held. Following the Share Split, Class A Shares continued receiving regular monthly cash distributions targeted to be $0.075 per Class A Share. As a result of the Share Split, the level of downside protection available to the Preferred Shares decreased to approximately 49.0% after the Share Split from 52.6% as of the end of November 2024.

Despite the negative impact from the Share Split on the amount of downside protection available to the Preferred Shares, the amount of downside protection has increased significantly to 47.5% as of March 6, 2025 from 42.3% as of March 31, 2024. Dividend coverage ratio is slightly below 1.0x, indicating that the current dividend income earned by the Company is only marginally short of fully covering the Company's expenses and targeted distributions on the Preferred Shares. To supplement the Portfolio income, the Company may engage in covered call options and put option writing on all or a portion of the shares held in the Portfolio; engage in securities lending; and/or rely on realized capital gains. 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 4.8% per year for the remaining term.
Taking into consideration the increase in the amount of downside protection, the maturity extension, and the expected grind, Morningstar DBRS has upgraded the credit rating on the Preferred Shares to Pfd-3.

The main constraints to the credit rating are as follows:

(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) The Company relies on the Portfolio manager to generate additional income through methods such as option writing and securities lending.
(3) Concentration of the Portfolio in one industry.
(4) The monthly cash distributions to holders of the Class A Shares will likely create a grind on the Portfolio. This is 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 of $10.0 per Preferred Share to holders of the Preferred Shares on the Maturity Date.

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
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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.