PrefBlog

DBRS has announced (on 2021-4-14):

DBRS Limited (DBRS Morningstar) confirmed the Financial Strength Rating of Genworth Financial Mortgage Insurance Company Canada (Genworth or the Company) at AA. DBRS Morningstar also confirmed the Issuer Rating and Senior Unsubordinated Debt rating of Sagen MI Canada Inc. (Sagen; previously Genworth MI Canada Inc.), Genworth’s holding company, at A (high), the Preferred Shares rating at Pfd-2 (high), and the Fixed-to-Fixed Rate Subordinated Notes rating at A (low). DBRS Morningstar changed all trends to Stable from Negative.

KEY RATING CONSIDERATIONS
The trend change to Stable from Negative reflects the reduction in risk regarding the Canadian economic outlook from the prior year, when DBRS Morningstar changed the trends to Negative due to increased risk of mortgage defaults arising from the steep increase in unemployment levels resulting from the Coronavirus Disease (COVID-19) pandemic. DBRS Morningstar’s expectation of higher defaults resulting from elevated unemployment levels has not materialized primarily as a result of government actions intended to prevent homeowner defaults, including the Canada Emergency Response Benefit and the Canada Emergency Wage Subsidy. The improvement in Canada’s economic conditions in recent months includes a reduction in unemployment levels and a more positive GDP outlook compared with a year ago, combined with strong housing market conditions, all of which are factors that contribute positively to Sagen’s risk and earnings profile. Nonetheless, while risks are significantly reduced compared with the prior year, uncertainty remains regarding future economic conditions particularly as stimulus measures intended to protect the economy from the negative impacts resulting from the ongoing coronavirus pandemic slowly wind down, likely resulting in higher loss rates. It is important to note, however, that current delinquency levels are still very low relative to the historical norm, and the Company maintains an adequate amount of capital to protect itself against any unexpected losses. Despite an uncertain operating environment, Sagen has performed well in 2020, with the Company maintaining strong financials, as evidenced by low loss ratios, and increasing its market share and new business volumes. In our view, Sagen’s strong fundamentals provide strength to its rating assessment and positions it well to handle any unexpected developments regarding the length and nature of the eventual economic recovery. DBRS Morningstar recognizes the Company’s ability to navigate through the ongoing uncertain economic environment, given its proactive management, a conservatively underwritten insurance portfolio, and high levels of regulatory capital.

RATING DRIVERS
Given the current high rating level, an upgrade of the ratings is unlikely especially given continuing economic uncertainty. Conversely, a ratings downgrade would result if Sagen’s capital adequacy deteriorates substantially, leading to a reduced buffer over regulatory capital requirements, or if there is a material deterioration in its loss ratios over an extended period of time that negatively affects earnings. A ratings downgrade would also occur if there is a sustained increase in leverage from current levels, combined with a reduction in cash flow.

RATING RATIONALE
Despite the challenging operating environment, Sagen experienced a strong year in 2020, as evidenced by low loss ratios, high cure activity, and increases in new business volumes. As in prior years, Sagen’s financial metrics have benefitted from a strong housing market, resulting in stable and predictable earnings despite elevated unemployment levels. Government measures to support the economy through the pandemic also proved key to protecting the housing market and, consequently, the mortgage insurers from financial losses. Sagen also benefitted from market opportunities arising from the Canada Mortgage and Housing Corporation’s decision to tighten its underwriting criteria and consequently reduce its borrower base, allowing the private mortgage insurers to gain a significant amount of new business volumes in a short period of time. There remains some uncertainty regarding the nature of the eventual economic recovery and how long the stressed conditions will persist; however, Sagen’s continual efforts to strengthen its borrower profile, enhance its risk management, and maintain adequate amounts of regulatory capital should enable it to navigate a challenging environment successfully.

The Company’s capital structure has undergone a significant change in recent months, with the leverage ratio (calculated by DBRS Morningstar as debt plus preferred shares to total capital) increasing to 30% (on a proforma basis) from prior levels of approximately 10% to 15%. The Company has recently introduced preferred shares and hybrid bonds in its capital structure as well as increased the amount of senior debt. While Sagen’s net income and cash flow can comfortably support this higher level of debt, the increased leverage reduces some of its financial flexibility. While the ratings have not been negatively affected by the increase in debt, given the Company’s stable financials and high coverage ratios, a sustained increase in debt levels, particularly if combined with a reduction in cash flow, would put negative pressure on the ratings.

Brookfield Business Partners L.P. together with certain of its affiliates and institutional partners (collectively “Brookfield”) also recently wholly acquired the Company, increasing its ownership in Sagen to 100% effective April 2021 from 57% in 2020. The shift to a private one from a publicly traded company reduces Sagen’s ability to raise capital by issuing common shares, consequently reducing some of its financial flexibility. The ratings on Sagen have not been affected by the ownership change, given that there has been minimal change to the insurance operations while the Company’s risk profile has remained strong.

Canada’s strong housing market has bolstered the Company’s financials. The housing market has not been adversely affected so far in 2020 and 2021 because of several factors, including increased fiscal stimulus, lower interest rates, and a strengthened consumer balance sheet. By and large, homeowners that had initially opted to defer their mortgage payments have resumed making payments, eliminating the risk of delinquencies sharply rising as the deferral period from most lenders expires. While the recent runup in home prices increases the risk of a housing market bubble, it can also provide a greater equity cushion and result in lower average loan-to-value ratios, providing protection against an increase in claims losses.

Some regulatory risk remains on the horizon, as a heated housing market and rapid price increases in many parts of Canada may pressure governmental authorities to take certain actions, such as further tighten underwriting requirements to reduce the risk to the overall economy. Depending on future government actions, such measures may result in lower sales and consequently, lower new business volumes for mortgage insurers, including Sagen.

Canadian mortgage insurers are highly regulated, with insurers subject to stringent underwriting criteria and minimum regulatory capital levels. The credit profile of the Company’s average borrower is strong and is reflected in its loss ratios, which have been low for the past few years relative to the historical norm before the pandemic. As a monoline insurer, the Company has significantly increased risk during economic downturns, when economic growth prospects weaken and unemployment increases. Generally, mortgage default rates are closely linked to changes in unemployment. Given DBRS Morningstar’s current expectations, claims are likely to increase in 2021 and 2022, increasing the Company’s loss ratios from their current low levels, although the increase in losses is likely to remain manageable for the Company. Elevated levels of regulatory capital also provide an adequate buffer against unexpected increases in losses. To note, Sagen maintained minimum regulatory capital requirements through the 2008 economic downturn in Canada.

DBRS has announced (on 2021-4-28):

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating and Senior Unsecured Notes rating of Pembina Pipeline Corporation (Pembina or the Company) to BBB (high) from BBB, the Company’s Preferred Shares rating to Pfd-3 (high) from Pfd-3, and its Subordinated Notes rating to BBB (low) from BB (high). All trends are Stable.

The upgrades reflect (1) Pembina’s operational resiliency and financial flexibility during both the low oil price environment and the Coronavirus Disease (COVID-19) pandemic in 2020 as well as its strong credit metrics and liquidity during this period; and (2) a material reduction in Pembina’s potential exposure to commodity price risk as the Company indefinitely suspended the propane dehydrogenation (PDH) plant and polypropylene (PP) upgrading facility (PDH/PP Facility). Pembina also paused the development of the liquefied natural gas Jordan Cove project, which was part of the 2017 Veresen Inc. acquisition, as a result of regulatory and political uncertainties. The suspension of the PDH/PP Facility (or CKPC) was because of significant risk resulting from the coronavirus pandemic, mostly with respect to costs. Pembina assumed net-tax impairments of $258 million for Jordan Cove and $252 million for CKPC, which are sunk costs and have no impact on Pembina’s future cash flow. The indefinite suspension of the CKPC and the pause of the Jordan Cove development significantly improve Pembina’s business risk profile in the following ways: (1) elimination of potential exposure to commodity price risk associated with the operations of these projects; (2) reduction of project execution risk, including delays and cost overruns; (3) mitigation of regulatory and political uncertainties; and (4) allowing Pembina to focus on areas where it has expertise and leverage.

In line with DBRS Morningstar’s expectations, Pembina’s credit metrics in 2020 were very resilient through the low oil price environment and remained strong, at much higher than the level required for the BBB rating, given Pembina’s currently strong business profile. DBRS Morningstar expects that the Company’s financial performance will likely continue to remain strong in the medium term. Pembina also demonstrated its resiliency in managing the low crude oil price environment in the early part of 2020. In March 2020, Pembina, like all other pipelines and midstream asset operators and owners in Western Canada, faced a challenging situation during which the coronavirus pandemic and the collapse of crude oil prices had a profound impact on the energy sector, particularly on oil and gas producers. The upgrades also incorporate risks faced by Pembina, including operational disruptions, potentially lower volume throughput in the low price environment, rising counterparty credit risk, cost overruns, and delays for its capital projects. However, these risks can be mitigated (1) because more than 90% of Pembina’s EBITDA in 2021 is expected to be generated from long-term fee-based contracts, with a substantial portion from cost of service (COS) or take-or-pay (TORP); and (2) by the integration and strategic locations of Pembina’s infrastructure networks in Western Canada and in the United States. Further, Pembina implemented a number of measures, one of which was to defer its 2020 and 2021 capital expenditures (capex) to later years. The capex reduction, by almost 50% from what was previously planned, would have no material impact on Pembina’s existing cash flow level. This materially reduced free cash flow deficits in 2020 to approximately $200 million from more than $600 million in 2019 ($1.2 billion in 2017 and $1.5 billion in 2016).

While DBRS Morningstar believes that a prolonged coronavirus pandemic and/or another collapse of oil prices could materially affect Pembina’s credit profile; with the project suspensions, Pembina should be in a much stronger position to cope with these circumstances over the near to medium term. Based on the Company’s current capex program and its projected cash flow, DBRS Morningstar expects Pembina to generate free cash flow surplus after dividends and capex in 2021 and 2022. DBRS Morningstar expects Pembina to maintain strong cash flow and credit metrics over the near to medium term, which will be supported by the following: (1) long-term fee-based contracts account for more than 90% of estimated EBITDA in 2021 (including nearly 70% from COS or TORP contracts, which are not subject to volume risk); (2) approximately 75% of Pembina’s counterparties remain investment-grade credits or have split ratings, even with weakening credit counterparties resulting from the collapse of oil prices; (3) approximately 66% of Pembina’s top 20 counterparties are non-oil and gas producers and integrated oil and gas producers, significantly mitigating the impact of low oil prices; and (4) following the 2019 Kinder Morgan Canada (KMC) acquisition, Pembina significantly increased its size and diversification. Pembina’s well diversified infrastructure operations include 40% crude oil and condensate, 30% natural gas liquids, and 30% natural gas.

DBRS Morningstar believes that Pembina’s current credit profile is strong, providing it with good financial flexibility to cope with market volatility in the near to medium term; however, DBRS Morningstar could take a negative rating action if the Company’s credit metrics weaken materially from the current level on a sustained basis and/or if its business risk profile deteriorates significantly, particularly its future exposure to commodity price risk rising to 20% of EBITDA on a long-term basis.

Affected issues are: PPL.PF.A, PPL.PF.C, PPL.PF.E, PPL.PR.A, PPL.PR.C, PPL.PR.E, PPL.PR.G, PPL.PR.I, PPL.PR.O, PPL.PR.Q and PPL.PR.S.

DBRS has announced (on 2021-4-30):

DBRS Limited (DBRS Morningstar) changed the trend on all ratings of National Bank of Canada (National or the Bank) and its related entities to Positive from Stable and confirmed all ratings, including the Bank’s Long-Term Issuer Rating at AA (low) and Short-Term Issuer Rating at R-1 (middle). National’s Long-Term Issuer Rating is composed of an Intrinsic Assessment of A (high) and a Support Assessment of SA2, which reflects the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS Morningstar). As a result of the SA2 designation, the Bank’s Long-Term Issuer Rating benefits from a one-notch uplift.

KEY RATING CONSIDERATIONS
The Positive trends recognize National’s successful expansion of its footprint in targeted markets and niches across Canada, especially in Wealth Management (WM) and Financial Markets (FM). In addition the Bank’s strong performance over the last few years, with Personal and Commercial (P&C) and WM now contributing a larger portion of earnings, has placed National at the top of its peer range in terms of profitability metrics.

The rating confirmations reflect National’s dominance in its home province, the Province of Québec (Québec; rated AA (low) with a Stable trend by DBRS Morningstar), which had experienced strong economic growth prior to the Coronavirus Disease (COVID-19) pandemic. Furthermore, the Bank benefits from strong pre-provision earnings, while transformation efforts in its P&C business and growth of its WM business have driven growth in client deposits. The ratings also consider the small yet growing contribution of the U.S. Specialty Finance and International (USSF&I) segment, which DBRS Morningstar views as having a higher risk profile, as well as potentially more volatile earnings. Lastly, DBRS Morningstar notes that National’s FM business segment is an important contributor to the Bank’s franchise and has benefitted from the market volatility experienced in the last year. Although the majority of transactions are client driven, the segment’s activities could expose the Bank to increased capital markets risk from significant market downturns.

The ratings also consider the challenging economic environment because of the coronavirus pandemic, which has had an adverse impact on profitability and asset quality. Although unprecedented support measures put in place through monetary and fiscal stimuli have largely mitigated the negative impact of the crisis, DBRS Morningstar remains concerned that once these measures expire the economic impact on the already highly leveraged Canadian consumer could adversely affect Canadian banks.

RATING DRIVERS
Continued franchise momentum and improving operating performance while limiting the adverse impact on asset quality from the economic downturn would lead to an upgrade of the ratings.

Conversely, the ratings would be downgraded if there is a sustained deterioration in asset quality, especially from deficiencies in risk management, which would have a significant impact on profitability.

RATING RATIONALE
With its focused franchise and leading position in Québec, National generates strong underlying earnings, which contribute to the Bank’s ability to absorb credit losses. In F2020, earnings declined by 10% year over year to $2.1 billion, largely because of the impact of the pandemic as the Bank, like peers, took prudent provisions to manage the potential economic fallout. As a result, return on average common equity declined to 14.9% from 17.9% in F2019 but remains ahead of peers. Unprecedented support measures put in place through monetary and fiscal stimuli have mitigated some of the negative impacts of this crisis; however, near-term challenges remain given the scale of the economic disruption, renewed lockdowns, and ongoing challenges related to vaccine rollout.

In DBRS Morningstar’s view, prudent risk management and a conservative lending culture enable National to maintain strong asset quality metrics. Gross impaired loans remained at a low of 0.45% of gross loans as of Q1 2021—better than some of the Bank’s larger Canadian peers—as the majority of National’s credit exposure is underwritten in Québec, which has experienced a relatively benign credit environment in recent years and has not witnessed the real estate price appreciation seen in other provinces. Furthermore, although credit in the USSF&I segment is in riskier sectors or geographies, DBRS Morningstar notes that the segment’s loans only form 7% of the Bank’s total portfolio and that this credit risk has been historically well managed. DBRS Morningstar will continue to monitor the adverse impact of the coronavirus pandemic on the economies of both Canada and Québec, which may result in asset quality deterioration and higher provisioning needs.

The Bank has a strong funding profile with a growing retail and commercial deposit base. This includes an increase in the client’s share of wallet through various coordinated initiatives among the Bank’s P&C, WM, and FM divisions. As a result, according to DBRS Morningstar’s calculation, retail and commercial deposits make up 55% of total funding, one of the highest levels among large Canadian peers. Additionally, National has ready access to a wide range of wholesale funding sources to supplement deposit funding with a diverse international investor base. At the onset of the pandemic, like peers, National accessed several Government of Canada programs to supplement its funding. Most of these borrowings have been repaid. Meanwhile, the Bank enjoys the highest liquidity level among peers as measured by the Liquidity Coverage Ratio, which was 154% for Q1 2021, well above the regulatory minimum. Effective Q1 2021, the Bank began disclosing its net stable funding ratio (NSFR), which DBSR Morningstar views as a better gauge of funding resilience over the medium to longer term. National’s NSFR was 124%, which was above the regulatory minimum of 100%.

Capitalization is strong as National continues to organically generate sufficient capital to support balance sheet growth. As at January 31, 2021, National’s Common Equity Tier 1 (CET1) ratio stood at 11.9%. At this level, the Bank’s CET1 ratio was well above the regulatory minimum of 9% for Domestic Systemically Important Banks (D-SIBs), reflecting the Office of the Superintendent of Financial Institutions’ (OSFI) reduction in the Domestic Stability Buffer to 1.0% at the onset of the pandemic. Moreover, DBRS Morningstar expects National’s capital levels to continue to build over the near term, largely reflecting the restrictions placed by OSFI on capital management activities for D-SIBs. Additionally, the Bank reported a leverage ratio of 4.3% in Q1 2021 that was above the regulatory minimum of 3% and in line with its Canadian bank peers; however, DBRS Morningstar notes that this metric remains somewhat weaker than many global peers.

Affected issues are: NA.PR.A, NA.PR.C, NA.PR.E, NA.PR.G, NA.PR.S and NA.PR.W.

DBRS has announced (on 2021-5-4):

DBRS Limited (DBRS Morningstar) upgraded Fortis Inc.’s (Fortis) Issuer Rating and Unsecured Debentures rating to A (low) from BBB (high) and Fortis’ Preferred Shares rating to Pfd-2 (low) from Pfd-3 (high). DBRS Morningstar also changed all trends to Stable from Positive. On May 4, 2020, DBRS Morningstar changed the trends on Fortis’ ratings to Positive following a significant reduction in nonconsolidated debt and an improvement in liquidity as a result of the sale of a 51% interest in the Waneta Hydroelectric Expansion (the Waneta Expansion) and a $1.2 billion common equity issuance in December 2019. After the sale of the Waneta Expansion, approximately 99% of Fortis’ consolidated EBITDA has been from regulated utilities, with the remaining 1% from long-term contracted generation assets in Belize and British Columbia.

The rating upgrades reflect (1) Fortis’ strong nonconsolidated and modified-consolidated credit metrics, solid liquidity, and stable business risk profile in 2020; and (2) DBRS Morningstar’s expectation that Fortis will continue to maintain its strong credit profile in 2021 and over the medium term. Fortis has demonstrated financial resiliency to cope with the ongoing Coronavirus Disease (COVID-19) pandemic. The current ratings take into account Fortis’ structural subordination and mitigation factors such as the diversification of regulatory jurisdictions and the size, stability, and sustainability of cash flow, as well as potential risks associated with regulatory lags, operational disruptions, and capital project executions at its regulated utilities.

DBRS Morningstar recognizes that the coronavirus pandemic did not have a material impact on Fortis’ 2020 financial performance, operations, and major capital projects. Most of Fortis’ assets are essential services and are important to maintain continual economic activities and social and health safety. The pandemic has not significantly affected Fortis’ volume distributions to date. Approximately 83% of revenues are protected by either regulatory mechanisms such as deferral accounts and decoupling or under residential sales, which increased during the pandemic. Capital spending of $4.2 billion in 2020 was consistent with Fortis’ plan for the year and was reasonably financed at its regulated utilities.

From a regulatory perspective, there have not been material changes since DBRS Morningstar’s last rating review in May 2020. Regulated utilities in British Columbia are in their second year of the Multiple-Year Rate Plan (2020–24), which is similar to the 2013–19 Performance Base Regulation. Alberta’s regulated operations benefitted from a regulatory decision in which Alberta Utilities Commission (AUC) reversed its previous decision with respect to the 2018 Independent System Operator Tariff Application. The AUC decision resulted in the utility retaining approximately $400 million of unamortized customer contributions in the rate base. Regulated operations in Newfoundland, New York, and Arizona are under cost of service and have not experienced any material changes in their respective regulatory frameworks. ITC Holdings (ITC), a transmission company that Fortis acquired in 2016, continues to benefit from timely cost recovery, good return on its investments, and stable cash flow with a return on equity (ROE) increasing to 10.77% (including incentive adders) in 2020 compared with the previous all-in ROE of 10.63%.

With respect to Fortis’ financial risk profile, there has been significant improvement in Fortis’ nonconsolidated metrics over the previous years while its modified-consolidated metrics have remained strong and stable. Fortis’ stable modified-consolidated metrics reflect the fact that all Fortis’ regulated utilities tend to maintain their capital structure in line with the regulatory capital structure or deemed equity and that the financing of their capital expenditures (capex) has been reasonable to maintain their credit metrics. The improvement of nonconsolidated metrics reflects a significant reduction in corporate debt. Following the sale of Fortis’ 51% interest in the Waneta Expansion for approximately $1.0 billion and the issuance of approximately $1.2 billion in common equity, Fortis’ corporate debt decreased to approximately $3.6 billion at the end of 2020 from $5.4 billion in 2018 (approximately $6.0 billion following the ITC acquisition in 2016). In the meantime, cash flows to Fortis from its subsidiaries have significantly increased as the consolidated rate base grows. As a result, Fortis’ nonconsolidated metrics (as calculated by DBRS Morningstar) strengthened in 2019 and further improved in 2020 as follows: nonconsolidated debt-to-capital decreased to around 18% in 2020 from 26.5% in 2018 (31.7% in 2016), and cash flow-to-nonconsolidated debt increased to over 19% from 10.9% in 2018 (7.0% in 2016). DBRS Morningstar expects Fortis’ leverage level to remain stable over the medium term as there are currently no material financing requirements at the corporate level. Fortis expects to benefit from incremental cash flow at its subsidiaries as a result of a substantial capex program over the next five years.

Fortis expects its growth over the next few years to be mostly organic. Capex for the 2021–25 period increased modestly to $19.6 billion from $18.8 billion for the 2020–24 period. Most capex will be spent on regulated assets. As a result, Fortis’ regulated rate base, approximately $30.5 billion at mid-year 2020, is expected to grow to approximately $40.3 billion in 2025. This will further strengthen Fortis’ business risk profile as its operations will get larger and more diversified. Fortis plans to fund most of its capex program at its regulated utility level. The required funds will mainly be financed with subsidiaries’ internally generated cash flow (net of dividends to Fortis), debt issued at the subsidiaries, and a corporate dividend reinvestment program (which is common equity). DBRS Morningstar considers the financing plan to be reasonable and believes that it should not have a material impact on Fortis’ credit metrics (both nonconsolidated and modified-consolidated) in the near to medium term.

Given the rating upgrades, DBRS Morningstar believes that another positive rating action will not be likely in the medium term. DBRS Morningstar, however, would take a negative rating action if (1) Fortis’ business risk profile deteriorates significantly as a result of a weakening of the credit quality of its major subsidiaries or as a result of material acquisitions, which is unlikely based on Fortis’s current expansion plan; (2) its modified-consolidated metrics fall below the “A” rating range for a sustained period; or (3) Fortis’ nonconsolidated metrics materially weaken from the current level, especially if its nonconsolidated debt-to-capital increases substantially to around the 30% range on a long-term basis.

Affected issues are: FTS.PR.F, FTS.PR.G, FTS.PR.H, FTS.PR.I, FTS.PR.J, FTS.PR.K and FTS.PR.M.

DBRS has announced (on 2021-6-8):

DBRS Limited (DBRS Morningstar) upgraded its rating on the Preferred Shares issued by Life & Banc Split Corp. (the Company) to Pfd-3 from Pfd-3 (low). The Company invests in a portfolio of common shares (the Portfolio) issued by the six major banks in Canada (Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and The Toronto-Dominion Bank) and four Canadian life insurance companies (Great-West Lifeco Inc., Industrial Alliance Insurance and Financial Services Inc., Manulife Financial Corporation, and Sun Life Financial Inc.). The Portfolio is approximately equally weighted and rebalanced at least annually. The maturity date is October 30, 2023. The board of directors may extend the Company’s share term by successive terms of up to five years, provided that shareholders are given an optional retraction right at the end of each successive term.

Holders of the Preferred Shares are entitled to fixed cumulative quarterly dividends, offering a return of 5.45% per year on the original issue price of $10.00 per share. Holders of Class A Shares receive monthly distributions targeted at $0.10 per share. As protection to the holders of the Preferred Shares, an asset coverage test does not permit the Company to make monthly distributions to the Class A Shares if the dividends of the Preferred Shares 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. In addition, no special distributions can be made to the Class A Shares if, after such distribution, the NAV of the Portfolio is below $25.00.

The Company has the ability to write covered call options or engage in securities lending with respect to the common shares of the Portfolio to generate additional income to supplement dividend distributions. Securities lending exposes the Portfolio to the risk of loss if the borrower defaults on its obligations to return the borrowed securities and if the collateral is insufficient to reconstitute the portfolio of loaned securities.

On January 27, 2021, the Company completed a treasury offering of the Class A and Preferred Shares, raising $53.8 million in gross proceeds.

As of May 31, 2021, the downside protection available to the Preferred Shares was 49.2% and the dividend coverage ratio was about 1.0x. After experiencing a sharp decline in March 2020, the downside protection has recovered the losses within a year. It currently continues the upward trend. Taking into consideration the credit quality and diversification of the Portfolio as well as the amount of downside protection available to the Preferred Shares, DBRS Morningstar has upgraded the rating on the Preferred Shares to Pfd-3 from Pfd-3 (low).

The main constraints to the rating are as follows:
(1) The Company’s dependence on the value and dividend policies of the securities in the Portfolio.
(2) The reliance on the portfolio manager to generate a high yield on the Portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.
(3) Market fluctuations resulting from the response to the worldwide spread of the Coronavirus Disease (COVID-19) that could negatively affect the Company’s NAV.

The rating includes additional analysis of the expected performance as a result of the global efforts to contain the coronavirus. The DBRS Morningstar sovereigns group initially published its outlook on the coronavirus’ impact on key economic indicators for the 2020–22 time frame on April 16, 2020. DBRS Morningstar last updated the macroeconomic scenarios on March 17, 2021, in its “Global Macroeconomic Scenarios: March 2021 Update” at https://www.dbrsmorningstar.com/research/375376.

DBRS has announced (on 2021-6-24):

DBRS Limited (DBRS) upgraded the rating on the Preferred Shares issued by Dividend Growth Split Corp. (the Company) to Pfd-3 from Pfd-4 (high). The redemption date for both classes of shares issued is September 27, 2024. 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 right at the end of each successive term.

The Company holds a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio) issued by Canadian dividend-paying companies, each with a market capitalization greater than $2.0 billion. The Company may invest up to 20% of the Portfolio, from time to time, in global dividend growth companies. The Portfolio shall not include fewer than 15 investments. The Manager may rebalance and/or reconstitute the Portfolio more frequently than annually, at their discretion, so that the Company can respond to security or market developments on a timely basis.

Dividends received from the Portfolio are used to pay fixed cumulative quarterly dividends equal to $0.55 per annum (p.a.) to each Preferred Shareholder, yielding 5.5% on the original issue price of $10.00. Holders of Class A Shares receive monthly distributions targeted at $1.20 p.a. The net asset value (NAV) test in place prevents any distributions to the Class A Shares if the NAV of the Company falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares.

On June 1, 2021, the Company completed a treasury offering of the Preferred Shares and the Class A Shares raising approximately $34.8 million in gross proceeds.

As of June 17, 2021, the downside protection available to the Preferred Shares was 36.7%. The downside protection has fully recovered from the losses incurred in March 2020. The dividend coverage ratio is approximately 0.9x. The rating upgrade of the Preferred Shares to Pfd-3 took into consideration the current downside protection level, the time remaining until maturity, and the minimum downside protection provided by the asset coverage test.

The main constraints to the rating are as follows:

(1) The Company’s dependence on the value and dividend policies of the securities in the Portfolio.
(2) The reliance on the Manager to generate a high yield on the Portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.
(3) Market fluctuations resulting from the response to the worldwide spread of the Coronavirus Disease (COVID-19) that could negatively affect the Company’s NAV.

The rating includes additional analysis of the Company’s expected performance as a result of the global efforts to contain the coronavirus. The DBRS Morningstar sovereigns group initially published its outlook on the pandemic’s impact on key economic indicators for the 2020–22 time frame on April 16, 2020. DBRS Morningstar last updated the macroeconomic scenarios on June 18, 2021, in its “Global Macroeconomic Scenarios: June 2021 Update.” For details, see at https://www.dbrsmorningstar.com/research/380281.

DBRS has announced (on 2021-7-27):

DBRS Limited (DBRS Morningstar) upgraded the rating on the Preferred Shares issued by Canadian Banc Corp. (the Company) to Pfd-3 (high) from Pfd-3. The Company invests in a portfolio of common shares (the Portfolio) issued by the six largest Canadian banks: Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and The Toronto-Dominion Bank. Each of the six banks generally represents no less than 5% and no more than 20% of the net asset value (NAV) of the Portfolio. In addition, up to 20% of the Portfolio’s NAV may be invested in equity securities of Canadian or foreign financial services corporations other than the banks listed above.

Dividends received from the Portfolio are used to pay to holders of the Preferred Shares floating cumulative monthly dividends at a rate per annum equal to the prevailing prime rate in Canada plus 1.5%, with a minimum annual rate of 5% and a maximum annual rate of 8%. Holders of Class A Shares are entitled to receive monthly cash distributions targeted to be 10% annually based on the volume-weighted average market price of the Class A Shares for the last three trading days of the preceding month.

DBRS Morningstar expects the monthly cash distributions to the holders of the Class A Shares and operating expenses to cause an average grind on the Portfolio’s NAV of approximately 5.6% until the end of the term. An asset coverage test in place mitigates the effects of the grind by not permitting the Company to make monthly distributions to the Class A Shares if the dividends of the Preferred Shares are in arrears or if the NAV of the Portfolio falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares. In addition, no special distributions can be made to the Class A Shares if, after such distributions, the NAV is below $25. This ensures a sufficient level of protection to the holders of the Preferred Shares.

The main form of credit enhancement available to the Preferred Shares is a buffer of downside protection. The amount of downside protection available to the Preferred Shares as of July 15, 2021, was 56.8%. Although the credit quality of the underlying assets of the Portfolio is strong, the Portfolio is concentrated in the financial services industry. The floating nature of dividend distributions to the Preferred Shares and Class A Shares, while mitigated by predetermined ranges of dividend yields, may potentially increase the volatility of the protection available to holders of the Preferred Shares in a high interest rate environment. The Preferred Share dividend coverage ratio was approximately 1.0x.

The maturity date is December 1, 2023. On maturity, the holders of the Preferred Shares will be entitled to the value of the Portfolio, up to the face value of the Preferred Shares, in priority to the holders of the Class A Shares. The Class A Shareholders will receive the remaining value of the Company. The term may be extended beyond the termination date for additional terms of five years each as determined by the Company’s board of directors.

The amount of downside protection, dividend coverage, and time remaining until maturity warranted an upgrade to the rating on the Preferred Shares to Pfd-3 (high) from Pfd-3.

DBRS Morningstar also considered the following constraints to the rating:

(1) The reliance on the Portfolio manager to generate additional income through methods such as option writing.

(2) The monthly cash distributions to holders of the Class A Shares.

(3) The dependence of the downside protection available to holders of the Preferred Shares on the value of the underlying common shares, which are subject to share price volatility.

(4) Market fluctuations resulting from the response to the worldwide spread of the Coronavirus Disease (COVID-19) that could negatively affect the Company’s NAV.

The rating includes additional analysis of the Company’s expected performance as a result of the global efforts to contain the coronavirus. The DBRS Morningstar sovereigns group initially published its outlook on the pandemic’s impact on key economic indicators for the 2020–22 time frame on April 16, 2020. DBRS Morningstar last updated the macroeconomic scenarios on June 18, 2021, in its “Global Macroeconomic Scenarios – June 2021 Update.” For details, see https://www.dbrsmorningstar.com/research/380281.

DBRS has announced (on 2021-7-27):

DBRS Limited (DBRS Morningstar) upgraded the rating on the Preferred Shares issued by Dividend 15 Split Corp. II (the Company) to Pfd-3 (low) from Pfd-4. The Company holds a portfolio of common shares listed on the Toronto Stock Exchange (the Portfolio), which are issued by the following 15 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 Corp. Up to 15% of the net asset value (NAV) of the Portfolio may be invested in equity securities of issuers other than the companies listed above. The Portfolio is actively managed by Quadravest Capital Management Inc. The Company has the ability to write covered call options in respect of some or all of the common shares held in the Portfolio to generate additional income and supplement the dividends received on the Portfolio.

Dividends received from the Portfolio’s underlying common shares are used to pay fixed cumulative monthly cash distributions of $0.04792 per Preferred Share, yielding 5.75% annually on the original issue price of $10.00. Holders of the Class A Shares receive regular monthly cash dividends targeted at $0.10 per Class A Share, yielding 8% per annum on the original issue price of $15.00. No monthly distributions to the Class A Shares are 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 are made if the Company’s NAV is below $25.00. No distributions are currently made to holders of the Class A Shares.

The termination date is December 1, 2024. At maturity, 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.

As at June 30, 2021, the downside protection available to the Preferred Shares was 35.0%, and the dividend coverage ratio was approximately 0.7x. The rating upgrade on the Preferred Shares to Pfd-3 (low) from Pfd-4 is based on the current downside protection level and the minimum downside protection provided by an asset coverage test, which does not permit any distribution to the holders of Class A Shares if the Company’s NAV falls below $15.00.

The main constraints on the rating are:

(1) The Company’s dependence on the value and dividend policies of the securities in the Portfolio.

(2) The reliance on the Portfolio manager to generate additional income through methods such as option writing.

(3) Market fluctuations resulting from the response to the worldwide spread of the Coronavirus Disease (COVID-19) that could negatively affect the Company’s NAV.

The rating includes additional analysis of the Company’s expected performance as a result of the global efforts to contain the coronavirus. The DBRS Morningstar sovereigns group initially published its outlook on the pandemic’s impact on key economic indicators for the 2020–22 time frame on April 16, 2020. DBRS Morningstar last updated the macroeconomic scenarios on June 18, 2021, in its “Global Macroeconomic Scenarios – June 2021 Update.” For details, see https://www.dbrsmorningstar.com/research/380281.

DBRS has announced (on 2021-6-8):

DBRS Limited (DBRS Morningstar) upgraded its rating on the Preferred Shares issued by Brompton Lifeco Split Corp. (the Company) to Pfd-3 (low) from Pfd-4 (low).

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 Industrial Alliance Insurance and Financial Services Inc. The Portfolio is approximately equally weighted and is rebalanced at least annually. The maturity date is April 29, 2024. 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 term of the Company may be extended further beyond the new maturity date for additional terms of five years each, as determined by the Company’s board of directors.

The Preferred Shares are entitled to receive fixed cumulative, quarterly distributions in the amount of $0.15625 per preferred share, yielding 6.25% annually on the issue price of $10.00 per share. 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 special distributions in excess of $0.075 per month will be made if the NAV of the Company is below $25.00. The Company has the ability to write covered-call options or cash-covered put options with respect to all or part of the common shares of the Portfolio and may also engage in securities lending to generate additional income to supplement the dividends received on the Portfolio.

The main form of credit enhancement available to the Preferred Shares is a buffer of downside protection. Downside protection corresponds to the percentage decline in market value of the Portfolio that must be experienced before the Preferred Shares would be in a loss position. As at May 31, 2021, the amount of downside protection available to the Preferred Shares was 39.0%. The dividend coverage ratio was 0.7x.

In its analysis, DBRS Morningstar has considered the current level and trend of downside protection of the Company. After experiencing a sharp decline in March 2020, the downside protection has fully recovered the losses within a year. Some other important rating considerations were the credit quality and diversification of the Portfolio as well as changes in dividend policies of the underlying companies in the Portfolio. Based on these considerations and performance metrics, DBRS Morningstar upgraded the rating of the Preferred Shares issued by the Company to Pfd-3 (low) from Pfd-4 (low).

The main constraints to the rating are as follows:

(1) The Company’s dependence on the value and dividend policies of the securities in the Portfolio.
(2) The reliance on the manager to generate a high yield on the Portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.
(3) Market fluctuations resulting from the response to the worldwide spread of the Coronavirus Disease (COVID-19) that could negatively affect the Company’s NAV.

The rating includes additional analysis of the expected performance as a result of the global efforts to contain the coronavirus. The DBRS Morningstar sovereigns group initially published its outlook on the coronavirus’ impact on key economic indicators for the 2020–22 time frame on April 16, 2020. DBRS Morningstar last updated the macroeconomic scenarios on March 17, 2021, in its “Global Macroeconomic Scenarios: March 2021 Update” at https://www.dbrsmorningstar.com/research/375376.