DBRS Confirms Ratings on Power Corporation at A (high), Pfd-2 (high)

DBRS has today confirmed the long-term and preferred shares ratings of Power Corporation of Canada (POW or the Company) at A (high) and Pfd-2 (high), respectively. The trend on the ratings remains Stable. The credit strength of POW is directly tied to its 66.1% equity interest in Power Financial Corporation (PWF; see separate press release), which represents a substantial majority of the Company’s earnings and cash flow, as well as 82% of the Company’s estimated net asset value as of June 30, 2012. The Senior Debt rating of the Company is A (high), or one notch below the AA (low) rating on the Senior Debentures of PWF, reflecting the structural subordination of the holding company’s obligations.

The Company remains exposed to the advice-centered distribution model of protection and wealth management products and 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 tied to equity markets, and the level of interest rates, as well as 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 (largely focused on large European industrial products), a variety of small investments in China and Hong Kong, direct investments in media, and various equity investment vehicles focused on small and medium-sized companies in Europe and the United States. 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 interests, should create additional shareholder value. Presently, non-financial services investments account for just over 10% of the Company’s asset value, with cash on hand and short-term investments accounting for 6%.

As the controlling shareholder of PWF, and, by extension, of 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 analysis and 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 it has served the Company’s stakeholders well.

On a stand-alone basis, POW’s financial profile is very conservative, with debt and preferred shares representing just 13.1% of capitalization, albeit up from 7.9% at year-end 2007. There is no double leverage in the Company’s capital structure as only shareholders’ equity, and not the proceeds from 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 over $850 million in cash and short-term securities at June 30, 2012. 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 financial and risk 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.

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

The applicable methodology is Rating Holding Companies and Their Subsidiaries, which can be found on our website under Methodologies.

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.