DBRS Morningstar Confirms Big Pharma Split Corp. Preferred Shares at Pfd-3 (high)

DBRS Limited (DBRS Morningstar) confirmed the rating of Pfd-3 (high) on the Preferred Shares issued by Big Pharma Split Corp. (the Company).

The Company invests in equally weighted common shares and securities (the Portfolio) convertible into or exchangeable for common shares (Equity Securities) of 10 issuers from the investable universe that must (1) be listed on a North American exchange, (2) pay a dividend, and (3) have sufficiently liquid options for their Equity Securities to permit the Portfolio Manager (i.e., Harvest Portfolio Group Inc.) to write options regarding such securities. The Portfolio Manager reconstitutes and rebalances the Portfolio at least semiannually. No more than 20% of the net asset value (NAV) of the Company can be invested in securities other than from the 10 largest pharmaceutical issuers at the time of each semiannual rebalance and reconstitution.

The board of directors extended the Company's maturity date for another five years to December 31, 2027. 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 and any accrued but unpaid dividends in priority to the holders of the Class A Shares.

As of July 31, 2023, the Portfolio consisted of Zoetis Inc. (10.7%), AbbVie Inc. (10.4%), Sanofi S.A. ADR (10.3%), Johnson & Johnson (10.2%), AstraZeneca Plc. (10.1%), Amgen Inc (9.7%), Eli Lilly and Company (9.4%), Merck & Co. Inc. (9.4%), Bristol-Myers Squibb Company (8.9%), and Pfizer Inc (8.7%). The Portfolio securities remained unchanged over the course of the past year except for the new addition of Zoetis Inc. in place of Novartis Inc. Eight of the 10 securities are selected from the largest pharmaceutical issuers in North America, as determined by market capitalization, and the remaining two (large biotechnology firms) are selected by Harvest Portfolio Group Inc. (the Portfolio Manager) from the Investable Universe. The Portfolio Manager hedges substantially all of the Portfolio's U.S.-dollar exposure back to the Canadian dollar.

Holders of the Preferred Shares receive a quarterly fixed cumulative dividend in the amount of $0.125 per share to yield 5.00% per year on the issue price of $10.00. Holders of the Class A Shares receive regular monthly noncumulative distributions targeted to be $0.1031 per Class A Share to yield 8.25% per year on the issue price of $15.00. The Class A Share distributions are subject to the asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.00 or if the dividends of the Preferred Shares are in arrears. No monthly distributions in excess of $0.1031 will be made to the Class A Shares if after such payment the NAV per Unit becomes less than $23.50 except when the Company has to make such payment to fully recover refundable taxes.

As of August 23, 2023, the downside protection improved to 60.0% from 57.2% on August 31, 2022. Dividend coverage based on the current dividend yield on the portfolio was 0.3 times (x). Without giving consideration to the capital appreciation potential or any source of income other than the dividends earned by the portfolio, the targeted monthly distributions to the Class A Shares may create a grind on the portfolio's NAV equivalent to 7.5% over the remaining term to maturity. The Company can write covered call options for some or all of the portfolio's common shares to generate additional income to supplement the dividends received on the portfolio.

DBRS Morningstar notes the following announcements from the Company during the last 12 months:

(1)	On October 24, 2022

The Company extended the maturity date of the Class A Shares and Preferred Shares to December 31, 2027, from December 31, 2022.

(2)	On December 7, 2022

The Company established its at-the-market equity program (ATM Program) that will be in effect until January 6, 2025, and allows maximum gross proceeds of $75 million of each of the Preferred Shares and the Class A Shares. The ATM Program allows the Company to issue Class A Shares and Preferred Shares from time to time at the Company's discretion.

Considering the stability of downside protection, the recent term extension and potentially resulting in grind on the Portfolio, the dividend coverage, and the substantially hedged foreign exchange exposure, DBRS Morningstar confirmed the rating on the Preferred Shares at Pfd-3 (high).

The main constraints to the rating are the following:

(1)	Market fluctuations resulting from high inflation and interest rate hikes could affect the Company's NAV. Resulting volatility in 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 Portfolio Manager to generate additional income, through option writing, to meet distributions and other trust expenses without having to liquidate the Portfolio's securities.

(3)	The concentration of the Portfolio in one industry.

(4)	Stated monthly distributions on the Class A Shares may create a grind on the Portfolio. This risk is mitigated by an asset coverage test of 1.5x that ensures sufficient levels of downside protection to the holders of the Preferred Shares.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

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

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/416784 (July 4, 2023).

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 16, 2023; https://www.dbrsmorningstar.com/research/415986).

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

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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 [e-mail].

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.

DBRS Morningstar 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

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Toronto, ON M5H 3M7 Canada

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

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [e-mail].

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