PrefBlog

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.

DBRS has announced (on 2021-3-29):

DBRS Limited (DBRS Morningstar) downgraded Brookfield Property Partners L.P.’s (BPP) Issuer Rating and Senior Unsecured Debt rating to BBB (low) from BBB. DBRS Morningstar also downgraded its ratings on Brookfield Property Finance ULC’s Senior Unsecured Notes and Brookfield Office Properties Inc.’s Senior Unsecured Notes to BBB (low) from BBB and Brookfield Office Properties Inc.’s Cumulative Redeemable Preferred Shares, Class AAA to Pfd-3 (low) from Pfd-3. All trends have been changed to Stable from Negative. DBRS Morningstar notes that the ratings are based on the credit risk profile of the consolidated entity, including BPP and its subsidiaries (collectively, BPY or the Partnership).

The rating downgrades principally reflect BPY’s weaker-than-expected key financial risk metrics, particularly total debt-to-EBITDA (18.7 times (x) on a last-12-months (LTM) basis at December 31, 2020), as a result of the significant impact the ongoing Coronavirus Disease (COVID-19) pandemic and consequent economic slowdown has had on BPY’s operations and tenants. Negative impacts include rent deferrals and abatements, increased bad debt reserves, lower short-term revenues (parking, temporary tenants, etc.), increasing vacancy because of tenant bankruptcies (concentrated in BPY’s Core Retail segment), and the impact of drastically lower travel demand on BPY’s hotel portfolio (concentrated in BPY’s LP Investments segment).

DBRS Morningstar has also modestly revised downward its overall business risk assessment of BPY because of a lower assessment of BPY’s asset quality, partially offset by improvement in market position. DBRS Morningstar is of the view that, while still of high overall quality, demand for BPY’s enclosed shopping centre assets in the U.S. will take time to recover, as evidenced by cash flow volatility through the pandemic, the discretionary nature of its tenants with elevated counterparty risk, and tempered transaction activity resulting in a lower asset quality assessment. On the other hand, DBRS Morningstar has revised upward its assessment of BPY’s market position as a top player in the global real estate industry across real estate categories, as proven by BPY’s continued ability to transact through the pandemic in multiple respects, such as leasing, capital recycling, and financing initiatives. The net impact of the revisions to asset quality and market position result in a modest deterioration in BPY’s stand-alone credit assessment.

The Stable trends consider DBRS Morningstar’s expectation for significant improvement in BPY’s total debt-to-EBITDA to below 16.0x by YE2022, with continued improvement thereafter. This expectation is supported by DBRS Morningstar’s view that the worst of the economic fallout from the pandemic has already occurred and that BPY should see a recovery in EBITDA as the economy gradually normalizes, resulting in improved cash rent collections, fewer bad debt expenses, improving occupancy driven by fewer bankruptcies and re-leasing to well-positioned tenants, increasing short-term revenue streams, and improving travel demand for its hotel accommodations, as well as stabilization of its office development projects (e.g., One Manhattan West and 100 Bishopsgate). DBRS Morningstar anticipates that the aforementioned growth drivers will be partially offset by accelerating capital recycling activity as BPY disposes of noncore assets and/or partial interests in core assets and uses the proceeds to pay down debt and fund capital expenditures. As a result of all the above, DBRS Morningstar expects BPY’s EBITDA to increase to approximately $3.1 billion and total debt to decrease to approximately $48.0 billion by YE2022 (from $2.8 billion and $52.2 billion in 2020, respectively).

The ratings continue to be supported by (1) the Partnership’s robust access to liquidity of $5.5 billion, consisting of $1.7 billion in cash and cash equivalents and $3.8 billion available on credit facilities at December 31, 2020; (2) financial flexibility afforded by nonrecourse mortgage debt and no unsecured maturities until October 2021, when the $314 million Series 2 Senior Unsecured Notes come due; (3) DBRS Morningstar’s view of implicit support from Brookfield Asset Management Inc. (BAM; rated A (low) with a Stable trend by DBRS Morningstar); (4) BPY’s market position as a pre-eminent global real estate company; and (5) high-quality assets, particularly its Core Office segment, with long-term leases in place and large, recognizable investment-grade-rated tenants. The ratings continue to be constrained by BPY’s weak financial risk assessment as reflected by both its highly leveraged balance sheet and low EBITDA interest coverage (1.25x LTM); a riskier retail leasing profile in terms of lease maturities and counterparty risk relative to BPY’s Core Office segment; a higher-risk opportunistic LP Investments segment composed primarily of hotel, office, retail, and alternative assets; and DBRS Morningstar’s assessment of the unmitigated structural subordination of the Senior Unsecured Debt at the BPP level relative to a material amount of debt at its operating subsidiaries.

With these rating downgrades, BPY continues to have little in the way of financial flexibility for the ratings. Indeed, DBRS Morningstar would consider a further negative rating action should BPY’s operating environment fail to improve as expected such that total debt-to-EBITDA remains above 16.0x on a sustained basis, all else equal, or if DBRS Morningstar changes its views on the level and strength of implicit support provided by BAM. DBRS Morningstar does not anticipate a positive rating action for the foreseeable future given the constraints noted above.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Affected issues are: BPO.PR.A, BPO.PR.C, BPO.PR.E, BPO.PR.G, BPO.PR.I, BPO.PR.N, BPO.PR.P, BPO.PR.S, BPO.PR.T, BPO.PR.W, BPO.PR.X and BPO.PR.Y.

Sun Life Financial Inc. has announced (on 2021-8-4):

On September 29, 2021, we intend to redeem all of the $400 million Class A Non-Cumulative Preferred Shares Series 1 and all of the $325 million Class A Non-Cumulative Preferred Shares Series 2. The redemptions are subject to regulatory approval and will be funded from existing cash and other liquid assets in SLF Inc. The redemptions will result in a reduction in SLF Inc.’s LICAT ratio and financial leverage ratio of approximately three and two percentage points, respectively. Sun Life Assurance’s LICAT ratio will not be impacted.

This follows an earlier announcement (on 2021-6-23):

that it intends to issue in Canada $1 billion principal amount of 3.60% Limited Recourse Capital Notes Series 2021-1 (Subordinated Indebtedness) (the “Notes”). The offering is expected to close on June 30, 2021. The net proceeds will be used for general corporate purposes of the Company, which may include investments in subsidiaries, repayment of indebtedness and other strategic investments.

The Notes will bear interest at a fixed rate of 3.60% annually, payable semi-annually, for the initial period ending on, but excluding, 2026. Thereafter, the interest rate on the Notes will reset every five years at a rate equal to the prevailing 5-year Government of Canada Yield plus 2.604%. The Notes mature on June 30, 2081.

In connection with the issuance of the Notes, the Company will issue 1 million Class A Non-Cumulative Rate Reset Preferred Shares Series 14 (the “Series 14 Shares”) to be held by Computershare Trust Company of Canada as trustee of a newly formed trust (the “Limited Recourse Trust”). In case of non-payment of interest on or principal of the Notes when due, the recourse of each noteholder will be limited to that holder’s proportionate share of the Limited Recourse Trust’s assets, which will consist of Series 14 Shares except in limited circumstances.

Subject to prior regulatory approval, the Company may redeem the Notes, in whole or in part on not less than 15 nor more than 60 days’ prior notice by the Company, on June 30, 2026 and every five years thereafter during the period from May 31 to and including June 30, commencing in 2031, at a redemption price equal to par, together with accrued and unpaid interest up to, but excluding, the date of redemption.

Additional details of the offering will be set out in a prospectus supplement that the Company intends to issue pursuant to its short form base shelf prospectus dated March 19, 2021, both of which are or will be available on the SEDAR website for Sun Life Financial Inc. at www.sedar.com. The Notes will be sold on a best efforts agency basis by a syndicate co-led by RBC Capital Markets, BMO Capital Markets and TD Securities. The proceeds from this offering are expected to qualify for Tier 1 capital.

SLF.PR.A and SLF.PR.B were both PerpetualDiscounts, paying 4.75% and 4.80% respectively, that were issued in 2005.

Update, 2021-8-13: DBRS has finalized the LRCN rating:

DBRS Limited (DBRS Morningstar) finalized its provisional rating of A (low) with a Stable trend on Great-West Lifeco Inc.’s (Great-West or the Company) Limited Recourse Capital Notes Series 1 (Subordinated Indebtedness). DBRS Morningstar assigned the rating equal to the Company’s Issuer Rating of A (high) less two rating notches, which is consistent with DBRS Morningstar’s notching approach for debt instruments issued by insurance holding companies. This is two notches below the rating of Great-West’s Debentures.

Great-West expects to issue $1.5 billion of the Limited Recourse Capital Notes on August 16, 2021, with a maturity date of December 31, 2081. The Limited Recourse Capital Notes will have an initial five-year fixed rate of 3.60%.

RATING DRIVERS
An upgrade is unlikely in the intermediate term given the increase in financial leverage and integration risk following two large acquisitions. However, over the long term, a material improvement in financial leverage together with the successful integration of recent acquisitions, while maintaining strong earnings and regulatory capital levels, would result in an upgrade.

Conversely, the ratings would be downgraded if the Company experiences further sustained deterioration of its financial leverage, combined with weaker profitability and coverage ratios. Moreover, an adverse event causing regulatory capital to decline substantially or significant operational missteps with recent acquisitions, would result in a downgrade.