DBRS Places Cunningham Lindsey Group Inc. Under Review with Negative Implications

Dominion Bond Rating Service (DBRS) is today placing the long term B (low) rating of Cunningham Lindsey Group Inc. (the Company or CL) – formerly, Lindsey Morden Group Inc. – Under Review with Negative Implications. This action reflects the Company’s continuing weak financial performance and high debt ratio, especially given the Company’s significant debt maturities in 2008. The Company’s earnings and cash flow continue to be disappointing, with few immediate prospects for significant improvement. Financial flexibility is therefore limited.

The latest in a line of new management teams is attempting to position the Company for longer-term profitability, but this effort remains to be reflected in the results. The U.K. and International operations continue to report good profitability, based on the Company’s strong reputation and specialized, higher-margin services. The sale of the U.S. third party administration business in 2004, has removed a source of significant losses, while paving the way for greater focus on expanding market share in the traditional claims adjustment business. In Canada, the Company is expanding in the environmental claims and contracting niche, in addition to its traditional claims adjusting operations. In Europe, the goal is to enhance the Company’s ability to quickly bring costs into line with volatile and unpredictable revenues.

DBRS’s concern for the credit is mitigated somewhat by the active financial support of its parent, Fairfax Financial Holdings Limited (Fairfax), especially with respect to the Company’s $72 million non-revolving term loan facility due March 31, 2008. In 2005, Fairfax participated in a $32 million equity rights issue, the proceeds of which were subsequently used to reduce the loan to $72.8 million from $105 million. Fairfax has signed a letter supporting CL’s obligations under the loan facility, but such support does not apply to the Company’s obligations under the rated Debentures. Fairfax has also recently provided loans to the Company to cover operating cash flow deficiencies that have been greater than budgeted in 2006. However, financial support from Fairfax is weakened by the non-investment grade rating on Fairfax’s own obligations (BB (high)) and the absence of an explicit guarantee.

Note:
All figures in Canadian dollars unless otherwise noted.