Morningstar DBRS Confirms Prime Dividend Corp.'s Preferred Shares Credit Rating at Pfd-3

DBRS Limited (Morningstar DBRS) confirmed its credit rating on the Preferred Shares issued by Prime Dividend Corp. (the Company) at Pfd-3. The Company holds a portfolio (the Portfolio) of common shares of the six major Canadian banks, life insurance companies (Great-West Lifeco Inc., Manulife Financial Corporation, and Sun Life Financial Inc.), investment management companies (AGF Management Limited, CI Financial Corp., and IGM Financial Inc.), and companies in other industries (BCE Inc., TransAlta Corporation, TC Energy Corporation, Power Corporation of Canada, and TMX Group Limited). The Company may also invest up to 20% of the net asset value (NAV) in equity securities of issuers in the financial services or utilities sectors in Canada or the United States other than the Core Holdings. Individual Portfolio holdings cannot represent more than 10% of the NAV of the Company at the time of purchase. All Portfolio holdings are denominated in Canadian dollars and therefore, there is no currency risk. The Portfolio is actively managed by Quadravest Capital Management Inc.

The termination date of the Company is December 1, 2028. 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. The termination date can be extended further for additional terms of five years at the Company's discretion, provided that shareholders are given an optional special retraction right in connection with such extension.

Dividends received from the Portfolio are used to pay the Preferred Shares a monthly floating-rate distribution equal to the prevailing prime rate in Canada plus 2.35% per annum (p.a.) with a minimum of 5% p.a. and maximum of 8% p.a. based on the original issue price of $10. The distribution rate to holders of the Class A Shares is equal to 10% p.a. of the volume-weighted-average market price of the Class A Shares over the last five trading days of the preceding month. The NAV test in place prevents any distributions to the Class A Shares if the NAV per unit (one unit consists of one Preferred Share and one Class A Share) falls below $15.

The downside protection available to the Preferred Shares increased over the last year to 47.7% as of April 30, 2025, whereas the projected dividend coverage declined to 0.3 times (x). To supplement the Portfolio income, the Company may engage in covered call options and put option writing on all or a portion of the shares held in the Portfolio. Without giving consideration to capital appreciation potential or any source of income other than the dividends earned by the Portfolio, the Preferred Share distributions, together with the current distributions on the Class A Shares, will create a projected grind on the NAV of the Portfolio of approximately 5.7% per year over the next five years. The potential grind in the portfolio is mitigated by an asset coverage test of 1.5x.

The credit rating confirmation reflects the increase in the amount of downside protection, the decline in projected dividend coverage and potential grind on the Portfolio, term to maturity and portfolio diversification.

The main constraints to the credit rating are as follows:

(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) The Company relies on the Portfolio manager to generate additional income through methods such as option writing on the investment portfolio to meet distributions and other expenses without having to liquidate portfolio securities.

(3) The monthly cash distributions to holders of the Class A Shares will create a grind on the Portfolio. This is 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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/410863.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.