DBRS Confirms Ratings on Power Corporation

DBRS has today confirmed its assigned ratings on Power Corporation of Canada (POW or the Company) at current levels. The trend remains Stable. The credit strength of POW is tied directly to its 66.1% equity interest in Power Financial Corporation (PWF), which represents a substantial majority of the Company’s earnings and cash flow, as well as 84% of the Company’s estimated net asset value as of June 30, 2011. The senior debt rating for the Company is A (high), or one notch below the AA (low) rating on the senior debt obligations of PWF, reflecting the structural subordination of the holding company’s obligations.

The Company remains exposed to the advice-centered distribution model of financial services through its indirect investment in PWF’s major subsidiaries, Great-West Lifeco Inc. (GWO) and IGM Financial Inc. (IGM). Correspondingly, it is vulnerable to the financial market and economic volatility that affects asset management fees, required actuarial reserves and credit loss provisions. The Company has achieved modest industry and geographic diversification through non-financial investments in the Pargesa Holding S.A. (Pargesa) segment of PWF, CITIC Pacific, the Qualified Foreign Institutional Investor (QFII) licensed Chinese ”A” shares, direct investments in media and biotechnology and various equity investment vehicles focused on small and medium-sized industrial companies. These investments are not expected to generate meaningful earnings or cash flow contributions for the Company in the near term. However, over time, the value-based approach to investing in addition to the Company’s active shareholder interest should create additional shareholder value. Presently, non-financial services investments account for nearly 10% of the Company’s asset value, with cash on hand and short-term investments accounting for just over 5%.

As the controlling shareholder of PWF, and by extension, GWO and IGM, POW defines the strategic vision for its financial services investments, while setting the “tone from the top” in terms of conservative management style and risk tolerance. The Company’s senior officers and delegates exercise a greater degree of influence through their active participation on the respective boards and board committees of POW’s various subsidiaries than is generally the case at more widely held companies. Such an integrated management and governance approach is seldom encountered and has well served the Company’s shareholders and creditors, including preferred shareholders.

On a stand-alone basis, the financial profile of the Company is very conservative, with debt and preferred shares representing just 11.7% of capitalization, albeit up from 8.1% at year-end 2008. There is no double leverage in the Company’s own capital structure as only the Company’s shareholder equity, and not the proceeds of debt or preferred shares, is invested in the Company’s investment portfolio. Financial leverage appears to be used to fund a portfolio of cash and short-term investments and a modest level of working capital. The Company’s liquidity is strong, with close to $900 million in cash and short-term securities, though this will be drawn down closer to $600 million following the funding of the China Asset Management Company transaction, expected before year-end 2011. Given the uncertain economic and financial environment, building stores of liquidity is regarded by DBRS as prudent as both a defence against further market deterioration and as a potential source of readily available funding for possible acquisitions should opportunities present themselves. In this, POW is no different from its major subsidiaries that are also carrying large liquidity positions, continuing the theme of a consistent and integrated management approach across the organization.

DBRS believes that any major new strategic investments will remain consistent with the long-term growth and diversification strategies of the Company. Moreover, DBRS expects that any such acquisitions will continue to be prudently financed, with limited additional financial leverage taken on at either the POW or PWF holding company level.

While succession issues are a concern at closely-held companies, POW enjoys a tradition of successful senior management transition and continuity as reflected in consistent growth in profitability and earnings stability.

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.