DBRS Confirms GMP Capital Inc. Preferred Shares at Pfd-3 (low) with Negative Trend

DBRS has today confirmed the Pfd-3 (low) rating on the Cumulative Preferred Shares of GMP Capital Inc. (GMP or the Company). The trend remains Negative. The rating reflects the strength of the Company’s business franchise as a provider of investment banking and capital markets products and services to its targeted market of mid-sized, primarily Canadian companies, many operating in the resource and energy sectors. While DBRS recognizes the Company’s demonstrated resilience through the prolonged challenging market environment, the Negative trend reflects the current adverse commodities and M&A market environment, GMP’s modest earnings and coverage ratios and the uncertain outlook going forward given the uneven global economic recovery and overall subdued client demand. While the Company is more diverse geographically and by business line than in the past, GMP has yet to demonstrate the benefits originally anticipated by its U.S. acquisition.

The Company is more aggressively capitalized than it had been in earlier cycles with a total debt and preferred shares to capitalization ratio hovering near 30%, which is in the upper range of what is acceptable in this rating category. With weak earnings the fixed-charge coverage ratio continues to be low for the rating category, although DBRS does recognize that the current environment represents a low point in the cycle and thus metrics are expected to be in the weaker end of the ranges. An extended period of weakness without the Company being able to generate stronger results remains a concern. DBRS notes favourably the Company’s decision to preserve capital in the current uncertain economic environment and expects GMP to continue a prudent approach to retaining capital given the market conditions. It also continues to be important that GMP maintain its disciplined approach to risk management, including not over-committing on underwriting or principal trading in order to bolster revenues.

The primary methodology used to guide the assignment of ratings for GMP Capital Inc. is the Global Methodology for Rating Banks and Banking Organisations (June 2012) adjusted for the absence of bank-style balance sheet leverage. As GMP is not a bank with capital and liquidity ratios mandated by bank-type regulations, the adjustments include using coverage ratios and leverage ratios more typically used in a corporate rating. When assessing the rating of GMP’s preferred shares, DBRS also uses the typical corporate rating approach in its assessment rather than the bank rating approach which generally utilizes wider notching.

Notes:
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.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2012), Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions) (December 2013), and Rating Holding Companies and Their Subsidiaries (January 2014) which can be found on the DBRS website under Methodologies.

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