DBRS Limited (Morningstar DBRS) confirmed the ratings of the Cumulative Redeemable Series 1 Preferred Units (the Series 1 Preferred Units) and 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) at Pfd-2 (high).

The rating confirmations are based on the level of downside protection and the distribution coverage ratio on the Preferred Units issued by the Fund as well as the diversification of the Portfolio.

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. Holders of the Fund's common units (the Units) have the right to redeem up to 10% of the then-outstanding Units of the Fund once each calendar year. In 2023, 57,843 Units were submitted for redemption, equivalent to 0.03% of the current outstanding Units. As of December 31, 2023, the Fund's portfolio (the Portfolio) was mainly allocated to the following sectors: financials (30.0%), industrials (19.3%), energy (16.6%), healthcare (12.1%), and materials (11.7%). Investments in consumer discretionary, consumer staples, information technology, and communication services, together with corporate bonds and cash, and net of liabilities, represented the remaining 10.3%.

The Fund's functional currency is the Canadian dollar. 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. As of December 31, 2023, 49.0% of the total Portfolio was exposed to the U.S. dollar. The Fund may use foreign currency exchange contracts to manage the Fund's currency exposure. The Fund's net exposure to foreign currency risk is further reduced as its U.S. dollar-denominated investments are partially offset with U.S. dollar borrowings under a margin facility, creating a natural hedge on a portion of the U.S. dollar-denominated portfolio.

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 incurs 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. At December 31, 2023, the margin facility outstanding was 4.1% of net assets compared with 4.5% on December 31, 2022.

The Preferred Unit holders receive quarterly cumulative preferential cash distributions of $0.30, representing a 4.80% return on the issue price of $25.00. The holders of the Units receive targeted monthly cash distributions amounting to $1.20 per annum. 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 Series 1 Preferred Units and the Series 2 Preferred Units are already redeemable at the option of the Fund, since March 15, 2022, and since March 15, 2023, respectively. The Preferred Units are retractable for a cash price of $25.00 at the option of the holder on or after March 15, 2024, for the Series 1 Preferred Units and on or after March 15, 2025, for the Series 2 Preferred Units.

The Fund has the ability to issue additional Units through an at-the-market equity program (ATM Program). In December 2022, the Fund renewed this ATM Program to allow the Fund to issue up to $625 million of units. The ATM Program will be effective until January 7, 2025. For the year ended December 31, 2023, 17.9 million units were issued under the ATM Program at an average price per unit of $12.92 for gross proceeds of $231.5 million.

As of January 24, 2024, the downside protection available for Preferred Units was 87.9% with an asset coverage ratio of 8.3x and a dividend coverage of 1.8x. 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 8.0% until the end of term. 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.

The main constraints to the ratings 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 Units' dividend coverage or downside protection from time to time.
(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.

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 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 Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

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://dbrs.morningstar.com/research/415986.

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

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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 analyzes 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.

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