DBRS Limited (DBRS Morningstar) confirmed the rating of Pfd-3 on the Preferred Shares issued by Canadian Banc Corp. (the Company).

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.

The termination date of the Company 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 for additional terms of five years each, as determined by the Company's board of directors. Shareholders will be provided with a special retraction right in connection with any such extension.

Holders of the Preferred Shares receive monthly distributions at a rate of Prime + 1.5% per annum (minimum 5%, maximum 8%) on the issue price of $10.00. Holders of Class A Shares are entitled to receive monthly cash distributions targeted to be 15% annually based on the volume-weighted average market price of the Class A shares for the last three trading days of the preceding month. An asset coverage test in place 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 NAV of the Portfolio falls below 1.5x of the principal amount of the outstanding Preferred Shares. To supplement Portfolio income, the Portfolio Manager engages in call option writing.

As of November 15, 2022, the amount of downside protection available to the Preferred Shares was 53.1%. The dividend coverage ratio was 0.6x. Regular distributions to holders of the Class A Shares, along with the Company's operational expenses, are projected to cause an average annual portfolio grind of about 9.5% in the remaining term ending on December 1, 2023.

Considering the credit quality of the Portfolio, as well as the amount of downside protection available to the Preferred Shares, projected grind, and a consistent dividend-paying history of the underlying companies in the Portfolio, DBRS Morningstar confirmed the rating on the Preferred Shares at Pfd-3.

The main constraints to the rating are the following:

(1) Market fluctuations resulting from high inflation, interest rate hikes, oil prices, and global supply chain issues could further affect the Company's NAV. The downside protection available to holders of the Preferred Shares depends on the value of the common shares held in the Portfolio.

(2) Volatility of price and 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.

(3) Reliance on the manager to generate a high yield on the investment portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

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

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance (ESG) 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/396929> (May 17, 2022).

Notes:

All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Split Share Companies and Trusts (June 22, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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 info@dbrsmorningstar.com' >info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com' >info@dbrsmorningstar.com.

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