Morningstar DBRS Confirms Dividend 15 Split Corp.'s Preferred Shares at Pfd-3

DBRS Limited (Morningstar DBRS) confirmed its rating on the Preferred Shares issued by Dividend 15 Split Corp. (the Company) at Pfd-3. The Company invests in a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio), which are issued by the following 15 core companies: Bank of Montreal, The Bank of Nova Scotia, BCE Inc., CI Financial Corp., Canadian Imperial Bank of Commerce, Enbridge Inc., Manulife Financial Corporation, National Bank of Canada, Royal Bank of Canada, Sun Life Financial Inc., TELUS Corporation, Thomson Reuters Corporation, The Toronto-Dominion Bank, TransAlta Corporation, and TC Energy Corporation. The Company may also invest up to 15% of the net asset value (NAV) of the Portfolio in equity securities of issuers other than the core 15 companies (it currently holds common shares from Suncor Energy Inc., Loblaw Companies Ltd., South Bow Corporation., Emera Inc., AGF Management Ltd. and the TMX Group Inc. The Portfolio is actively managed by Quadravest Capital Management (the Manager).

The Company's termination date has been extended for a further five-year period to December 1, 2029 from December 1, 2024. At termination, the holders of the Preferred Shares will be entitled to the value of the Company up to the face amount 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. The Company's board of directors can extend the termination date for additional successive terms of five years, provided that shareholders are given an optional special retraction right in connection with such extension.

The Preferred Shares are entitled to receive fixed cumulative monthly dividends in the amount of $0.05833 per Preferred Share for the additional five-year term from December 1, 2024 to December 1, 2029, yielding 7.0% per year on the issue price of $10. Holders of the Class A Shares receive regular monthly cash dividends targeted at $0.10 per Class A Share, yielding 8% per year on the original issue price of $15. No monthly distributions to the Class A Shares will be made if the dividends of the Preferred Shares are in arrears or if the Company's NAV falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions can be made if the Company's NAV per unit is below $25. (A unit consists of one Preferred Share and one Class A Share.)

As of March 31, 2025, the amount of downside protection available to holders of the Preferred Shares was 37.3%. The Company increased the Preferred Share dividend rate to 7.0% from 5.5% on the $10 repayment value for the new five-year term effective December 1, 2024, which lowered the dividend coverage ratio to approximately 0.8x from 1.0x in the previous term, indicating that the current dividend income earned by the Company is not enough to cover the Company's expenses and current targeted distributions on the Preferred Shares. 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 Preferred Shares and the Class A Shares will create a projected grind on the NAV of the Portfolio of approximately 2.4% per year over the next five years. The grind in the portfolio is mitigated by a 1.5x NAV test. 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 and/or rely on realized capital gains.

Taking into consideration the amount of downside protection available to the Preferred Shares, the extension to the termination date and the likely grind on the Portfolio, Morningstar DBRS has confirmed the rating on the Preferred Shares at Pfd-3.

The main constraints to the 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) Reliance on the Portfolio Manager to generate additional income, through option writing, to meet distributions and other trust expenses without having to liquidate the Portfolio's securities.

(3) The monthly cash distributions to holders of the Class A Shares will 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 monthly cash dividends and the return of the original issue price of $10 per Preferred Share to holders of the Preferred Shares on the termination 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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to our Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of our website.

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.