Morningstar DBRS Confirms Credit Rating on Canadian Large Cap Leaders Split Corp.'s Preferred Shares at Pfd-3 (high)

DBRS Limited (Morningstar DBRS) confirmed its credit rating of Pfd-3 (high) on the Preferred Shares issued by Canadian Large Cap Leaders Split Corp. (the Company). On February 4, 2025, the Company completed a Class A Share Split (the Share Split). Class A shareholders of record at the close of business on February 4, 2025, received 15 additional Class A Shares for every 100 Class A Shares held. Concurrently, the Company privately placed 235,000 Preferred Shares. Following the Share Split the downside protection declined to 57.3%, which is in line with the level of downside protection available at the time of the assignment of the initial credit rating. The credit rating confirmation takes into consideration the credit quality and diversification of the portfolio, the current level of downside protection, dividend coverage of 1.1 times (x) and projected grind of 7.4% per year over the remaining term of the Company. The maturity date of the Company is February 28, 2029. The term of the Company may be extended beyond the maturity date for additional terms of five years each as determined by the Company's board of directors, provided that shareholders are given an optional special retraction right at the end of each successive term. Ninepoint Partners LP (the Manager) is acting as the manager for the Company.

The Company invests in an approximately equally-weighted portfolio (the Portfolio) of equity securities of Canadian Dividend Growth Companies selected by the portfolio Manager that at the time of investment (i) are listed on a Canadian exchange, (ii) pay a dividend, (iii) generally have a market capitalization of at least $10 billion and (iv) have options in respect of its equity securities that in the opinion of the portfolio manager are sufficiently liquid to permit the portfolio manager to write options in respect of such securities. The current Portfolio consists of equity securities from the following 10 investment-grade companies, that are diversified by sector allocation: The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Canadian Natural Resources Ltd, Enbridge Inc., Fortis Inc., Manulife Financial Corp., Royal Bank of Canada, Sun Life Financial Inc., Suncor Energy Inc. and Telus Corp. The entire Portfolio's investments are denominated in Canadian dollars.

The Preferred Shares are entitled to fixed cumulative preferential quarterly cash distributions of $0.1875 (or $0.75 annually) per share, representing a 7.5% per annum return on the issue price of $10.00. Holders of the Class A Shares are expected to receive regular monthly noncumulative distributions targeted to be $0.125 (or $1.50 annually) per Class A Share. No monthly distributions to the Class A Shares will be made if (1) distributions to the Preferred Shares are in arrears or (2) in respect of a cash distribution, the Company's net asset value (NAV) falls below 1.5 times (x) the principal amount of the outstanding Preferred Shares.

As of February 13, 2025, the downside protection available to the Preferred Shares was 57.3% and the dividend coverage ratio was about 1.1x Without giving consideration to the potential for capital appreciation or any source of income other than the dividends earned by the Portfolio, the current distributions on the Class A Shares will create a projected grind on the NAV of the Portfolio of approximately 7.4% per year for the remaining term of the Preferred Shares. To supplement Portfolio income, the Manager may write covered call options on all or a portion of the shares held in the Portfolio, engage in securities lending, and rely on realized capital gains.

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 Preferred Shares' dividend coverage or downside protection from time to time.

(2) Reliance on the manager to generate a high yield, through methods such as option writing or securities lending, on the investment portfolio to meet distributions and other expenses without having to liquidate portfolio securities.

(3) Stated monthly distributions on the Class A Shares, which will create a grind on the Portfolio mitigated by an asset coverage test of 1.5x, which ensures sufficient levels of downside protection to the holders of the Preferred Shares.

Morningstar DBRS' credit ratings on the applicable classes address 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 factor(s) that had a significant or relevant effect on the credit analysis.

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

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

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

Other methodologies referenced in this transaction are listed at the end of this press release.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

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

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

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

This is a solicited credit rating.

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 dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.