Morningstar DBRS Confirms Credit Rating on Dividend 15 Split Corp. II's Preferred Shares at Pfd-3 (low)

DBRS Limited (Morningstar DBRS) confirms the credit rating on the Preferred Shares issued by Dividend 15 Split Corp. II (the Company) at Pfd-3 (low). The Company invests in the portfolio of dividend yielding common shares which includes 15 Canadian companies, namely, Bank of Montreal, Royal Bank of Canada, Bank of Nova Scotia, Sun Life Financial Inc., BCE Inc, TC Energy Corp., Canadian Imperial Bank of Commerce, TELUS Corporation, CI Financial Corp, Thomson Reuters Corporation, Enbridge Inc, The Toronto-Dominion Bank, Manulife Financial, TransAlta Corporation, National Bank of Canada. The Company may also invest up to 15% of the net asset value in equity securities of issuers other than the 15 companies listed above. An individual portfolio holding may represent no more than 10% of the net asset value of the Company at the time of purchase. 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 each, provided that shareholders are given an optional special retraction right in connection with such extension.

Dividends received from the portfolio are used to pay fixed cumulative monthly cash distributions. The Company increased the distribution rate for the new term that goes from December 1, 2024 to December 1, 2029 to $0.05833 per month, representing a 7.0% annual return on the original issue price of $10, up from 5.75% in the prior term. Holders of the Class A Shares currently receive regular monthly cash distributions, targeted to be $0.10 per Class A Share. Distributions to the Class A Shares are made only if the distributions on the Preferred Shares are not in arrears and the NAV per unit (which consists of one Class A and one Preferred Share) is in excess of $15. Distributions during the year ended November 2024 amounted to $0.7 per Class A share.

As of May 30, 2025, the downside protection available to holders of the Preferred Shares improved to 39.8% from 34.1% as of May 31, 2024, and the asset coverage was at 1.7 times (x). The dividend coverage declined to 0.7x from 1.0x a year ago, as a result of the increase in the distribution rate paid to Preferred shareholders and a lower weighted-average portfolio dividend yield. The dividend coverage below 1.0x indicates that the current dividend income earned by the Company is not enough to fully cover the Company's operating expenses and targeted distributions on the Preferred Shares. 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 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 3.4% per year over the next 5 years.

Considering the increase in the amount of downside protection available to holders of the Preferred Shares, decline in dividend coverage, portfolio diversification, term extension and likely portfolio grind, Morningstar DBRS confirmed the credit rating on the Preferred Shares at Pfd-3 (low).

The main constraints to the credit rating are as follows:

(1) Volatility of price and 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) Dividends and interest received on the Portfolio are currently unable to fully cover distributions on the Preferred Shares.

(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 the portfolio's securities.

(4) Stated monthly distributions on the Class A Shares will likely create a grind on the portfolio. 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.
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 (May 16, 2025) https://dbrs.morningstar.com/research/454196.

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 the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

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.