Morningstar DBRS Confirms Credit Rating on Canoe EIT Income Fund Cumulative Redeemable Series 2 Preferred Units and Withdraws Credit Rating on Cumulative Redeemable Series 1 Preferred Units

DBRS Limited (Morningstar DBRS) withdrew its credit rating on the Cumulative Redeemable Series 1 Preferred Units (the Series 1 Preferred Units) and confirmed its credit rating of Pfd-2 (high) on the Cumulative Redeemable Series 2 Preferred Units (the Series 2 Preferred Units; collectively with the Series 1 Preferred Units, the Preferred Units) issued by Canoe EIT Income Fund (the Fund).

Series 1 Preferred Units:

In March 2017, the Fund issued 5,635,000 Series 1 Preferred Units at a price of $25.00 per unit for gross proceeds of approximately $140.9 million. Under the terms of the issuance, the Series 1 Preferred Units are retractable for cash at $25.00 per unit at the option of the holder on or after March 15, 2024. Morningstar DBRS withdrew its credit rating on the Series 1 Preferred Units as the credit rating assigned reflects the credit risk up to the beginning date of the retraction option of March 15, 2024. On and after March 15, 2024, investors have been able to submit for retraction their Series 1 Preferred Units and have received their principal back and related accrued and unpaid distributions in accordance with the terms of issuance. There are still approximately 3.4 million Series 1 Preferred Units outstanding, as not all investors have exercised their retraction option.

Series 2 Preferred Units:

In April 2018, the Fund issued 3,200,000 Series 2 Preferred Units at a price of $25.00 per unit for gross proceeds of approximately $80.5 million. Under the terms of the issuance, the Series 2 Preferred Units are retractable for cash at $25.00 per unit at the option of the holder on or after March 15, 2025. The Series 2 Preferred Units are redeemable at the option of the Fund since March 15, 2023.

The Fund is a closed-end, actively managed investment trust focused on a broad range of income-producing investments in various industries, currencies, and geographic regions. The Fund's portfolio (the Portfolio) is broadly diversified, with investments in the financial (representing 26.9% of the total Portfolio as of December 31, 2024), energy (17.9%), industrials (14.6%), and information technology (10.5%) sectors. Investments in the consumer products, healthcare, consumer services, material, and communication services sectors represented the remaining 30.1%. The Fund is exposed to foreign exchange risk as some of the securities held in the Portfolio are denominated in currencies other than the Canadian dollar. The U.S. dollar exposure is partially hedged with borrowings in the same currency. The Fund may enter into foreign exchange contracts to further mitigate currency exchange risk.

The Preferred Unit holders receive quarterly cumulative preferential cash distributions of $0.30 representing a 4.80% annual return on the issue price of $25.00. The distributions are mainly funded through income received from the income-generating securities in the Portfolio.

Holders of the Fund Units (the Units) currently receive targeted monthly cash distributions of $0.10, amounting to $1.20 per year. The Fund is required to distribute any net income and realized capital gains prior to the end of its taxation year. Unitholders on record on December 31, 2024, received a special noncash distribution of $0.45 per Unit, which represented residual net realized gains and net income not previously distributed. The special noncash distribution was paid on January 15, 2025, in the form of additional Units. The additional Units were immediately consolidated with the previous outstanding Units such that the number of outstanding Units following the distribution was equal to the number of Units outstanding prior to the distribution. In addition, up to 10% of the aggregate outstanding Units may be redeemed at the option of the Unit holders each calendar year on a date determined by the Fund. In December 2024, 31,135 of the outstanding Units were redeemed for cash as part of the regular annual redemption option. No distributions can be declared or paid on any equity securities ranking by their term junior to the Preferred Units, nor can they be purchased for cancellation or redeemed pursuant to their terms, unless all distributions are current on all the series of the Preferred Units.

The Fund has the ability to issue additional Units through an at-the-market equity program (ATM Program). The issuance of additional Units increases the level of downside protection available to the Preferred Unit holders. In December 2024, the ATM Program was renewed to allow the Fund to issue up to $625 million of units of the Fund to the public at the discretion of Canoe Financial LP (the Manager). The ATM Program will be effective until January 17, 2027. During the first half of 2024, the Fund issued 2.4 million Units under the ATM Program for gross proceeds of $31.4 million.

The Fund allows borrowing of up to 20% of the value of total assets after giving effect to the borrowing. The Fund has a prime broker arrangement for its lending requirements. Under this arrangement, the Fund has access to a margin facility that permits the Fund to buy and sell securities on margin in Canadian and U.S. funds up to an aggregate borrowing amount not exceeding the value of the collateral portfolio securities held by the prime broker. Borrowings under the margin facility are repayable on demand, secured by portfolio securities of the Fund and incur interest at a rate equal to the Bank of Canada overnight rate plus 0.85% on Canadian dollar borrowing or U.S. Fed Funds rate plus 0.70% on U.S. dollar borrowing. As of June 30, 2024, the margin facility outstanding was equivalent to 4.0% of net assets.

As of January 16, 2025, the downside protection available for the Series 2 Preferred Units was 91.3% with an asset coverage ratio of 11.5 times (x) and a dividend coverage of 1.6x. Without giving consideration to capital appreciation potential or any source of income other than the dividends earned by the Portfolio, the current distributions on the Units will create a projected annual grind on net asset value of the Portfolio of approximately 6.9% over the next year. To supplement the Portfolio income, the Fund can engage in covered call option and put option writing on all or a portion of the shares held in the portfolio.

Based on the level of downside protection, the distribution coverage ratio and diversification of the Portfolio, Morningstar DBRS confirmed the rating of Pfd-2 (high) on the Series 2 Preferred Units issued by the Fund.

The main constraints to the credit rating are the following:

(1) Volatility in stock prices along with changes in the dividend policies of the underlying issuers may result in significant reductions in the Series 2 Preferred Units' dividend coverage or downside protection.

(2) The potential grind on the Portfolio arising from redemption rights and distributions to the Units.

(3) The foreign-exchange risk as a result of no hedge on some investments in foreign currencies.

(4) The priority of the amounts owed to the Custodian under the prime broker arrangement over the Fund's assets up to the amount of credit outstanding.

Morningstar DBRS' credit rating on the applicable classes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology applicable to the credit ratings is Rating Canadian Split Share Companies and Trusts (June 21, 2024) https://dbrs.morningstar.com/research/434794.

Other methodologies referenced in this transaction are listed at the end of this press release.The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.