DBRS Confirms Dundee Corporation at BBB (low) and Pfd-3 (low)

DBRS has today confirmed its Issuer Rating of BBB (low) and its Preferred Shares rating of Pfd-3 (low) on Dundee Corporation (Dundee or the Company). The rating trends remain Stable. The ratings on Dundee stem from the application of the DBRS holding company methodology, which generally requires a one-notch differential between the respective ratings of a parent company and a major operating subsidiary such as DundeeWealth Inc. (DW), which accounts for close to 60% of the value of the Company’s investment portfolio and a substantial percentage of its consolidated and cash earnings. Coincident with this confirmation, DBRS has confirmed its ratings on the rated instruments of DW, including the BBB Issuer Rating, which is the benchmark for the Dundee Corporation ratings.

The rating confirmations on DW reflect its increasing market share in the Canadian mutual fund industry and the associated revenue and earnings, which serve as a favourable testament to its business model and strategic execution. The 2009 sale of $269 million in asset-backed commercial paper (ABCP) floating-rate notes (FRNs) at 51 cents per dollar of face value reduced the remaining ABCP exposure to just $69 million, with a carrying value of just $5.6 million or 8 cents. This sale and the more recent sale of US$36 million in collateralized loan obligations remove a source of potential earnings volatility for the Company on a consolidated basis. DW generally represents three-quarters of the Company’s consolidated revenues and over half of its pre-tax earnings. (For further details, please see the forthcoming DBRS rating report on DundeeWealth Inc.)

In addition, the ratings are supported by the incremental earnings diversification contributed by the Company’s real estate activities, including property management and land and property development, as well as holdings of resource equities. The Company’s real estate interests continue to perform well, although there is generally little predictability in the financial contribution of real estate to the Company’s financial results and cash flow (with the exception of the Company’s 13% share of Dundee REIT’s unit holder distributions). Investments in resource-based equities give rise to a potential source of incremental earnings volatility as gains and losses are realized or impairment charges taken at the Company’s discretion. DBRS’s analysis attempts to look through the non-cash and non-recurring elements of the Company’s results to arrive at a measure of core profitability, which removes some of this associated volatility. The strong positive correlation between Canadian equity markets and resource prices, including land values and housing activity, suggests that the overall Dundee investment portfolio and associated earnings are only modestly diversified as all segments are exposed to the same investment theme of resource and land price inflation, as reflected in the President’s Report to Shareholders in the Company’s 2009 Annual Report.

While DBRS continues to rate Dundee as a holding company, it acknowledges that independently of its stake in DW, the Company continues to expand its own direct asset management operations, which are expected to become a source of future earnings. Even though DBRS gives only marginal weight to the Company’s holdings of land and resource investments, it also recognizes that the Company historically adds value through its disciplined investment process, which represents a longer-term strength in terms of winning fee-generating asset management mandates.

The Company’s financial leverage is largely in the form of preferred share capital as debt is more tax-efficiently issued out of the Company’s operating subsidiaries such as DW or Dundee Realty. In Q1 2010, the ratio of debt plus preferred shares-to-capitalization was 31.7% on a consolidated basis and 22% at the unconsolidated holding company, both of which are considered reasonable for the credit rating. The Company has been actively increasing financial leverage relative to EBITDA, with the ratio rising to 4.75 times as of the end of Q1 2010. Some of this increase is mitigated by the high cash balances at DW, which lowers the level of effective net debt on a consolidated basis, although the undeployed cash does not contribute much in the way of EBITDA. While the Company is not shy about leveraging its common equity base with financial instruments such as debt and preferred shares, DBRS estimates that double leverage remains prudent. Because the net asset value of the Company’s investment portfolio is approximately 50% greater than its recorded book value, effective financial leverage may in fact be more conservative than reported, albeit subject to market volatility. At 6.4 times, the market value of the Company’s portfolio provides good coverage of its fixed obligations, including preferred shares.

Liquidity is reasonable, even though the Company has a number of large ownership stakes in several small resource entities that may not always be liquid. In addition, the Company’s stakes in DW and in Dundee REIT are expected to generate close to $30 million in annual cash flow, which covers the Company’s own debt service obligations, including preferred share dividends, by approximately two times.

The shareholder agreement between the Company and the Bank of Nova Scotia (BNS), which gives BNS the right of first offer for any DW shares held by the Company, provides an additional source of potential liquidity under extreme conditions. The Company also has a $200 million revolving term credit facility, of which only $4.8 million has been drawn. Financial flexibility is also enhanced by the absence of any common dividend.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Parent /Holding Companies and their Subsidiaries, which can be found on our website under Methodologies

This is a Corporate (Financial Institutions) rating.