DBRS Confirms CI Financial Corp. and CI Investments Inc. at A (low)

DBRS has today confirmed its A (low) rating on the Senior Unsecured Debentures of CI Financial Corp. (CI or the Company) and on both the Issuer Rating and Senior Unsecured Debt ratings of CI’s major operating subsidiary, CI Investments Inc. (CII). The trend on all the ratings remains Stable. The Issuer Rating of CII reflects CII’s contribution to CI as its major operating subsidiary, housing the mutual fund manufacturing operation and representing more than 95% of consolidated CI revenues and earnings. CI’s senior debt benefits from a CII guarantee that ranks pari passu with the senior obligations of CII. Conversely, CII’s outstanding debt is likewise supported by a guarantee from CI on the same senior basis.

The primary driver of the ratings is the Company’s strong business franchise and its relatively large size in the mutual fund industry, which is particularly sensitive to economies of scale. This size benefit is offset to some extent by the volatility inherent in equity markets generally and by increasing competition from other wealth management service providers and products. Supporting the business has been strong fund performance, achieving first or second quartile ten-year performance from more than 80% of Company’s assets under management (AUM). DBRS attributes much of the Company’s success to effective operating procedures, discipline and active risk management controls.

As evidence of its strong and diversified product portfolio and effective distribution relationships, the Company has experienced positive net sales in each of the past 11 years, with the exception of 2003. Most of the recent net sales were accounted for by institutional funds, which earn a lower margin but can be more sticky, and by the Sun Life channel. The institutional business has been providing CI with AUM growth. While the Company’s own asset administration business (Assante Wealth Management (Canada) Ltd.) is break-even at best, it accounts for more than 15% of consolidated AUM with attendant revenue synergies.

The Company’s cash flow continues to be strong and covers cash commission outlays by greater than three times. With limited need for capital, the Company can easily maintain a relatively high payout ratio in excess of 60% in addition to regular repurchases of outstanding common shares. Debt-to-EBITDA nevertheless remains conservative as the Company approaches its 1:1 times target, having improved from 1.5 times in 2008 as the Company actively paid down debt in the wake of converting from an income trust back into a corporation. Financial leverage increased modestly in late 2010 with a net new debt issue, the proceeds of which were used to pay down a bank facility and fund the acquisition of the Canadian mutual fund operations of The Hartford Financial Services Group, Inc. The levels of financial leverage are consistent with the rating.

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

The applicable methodology is Rating Canadian Mutual Fund Companies, which can be found on our website under Methodologies.