DBRS Confirms Ratings on Power Financial Corporation at AA (low), Pfd-1 (low)

DBRS has today confirmed both the Issuer Rating and Senior Debentures rating of Power Financial Corporation (PWF or the Company) at AA (low) and the Cumulative and Non-Cumulative First Preferred Shares at Pfd-1 (low). All trends remain Stable. The financial strength of PWF, and DBRS’s rating assessment, is largely derived from its controlling interests in two of Canada’s leading financial service providers: Great-West Lifeco Inc. (GWO; senior debt rated AA (low)), one of the three largest life insurance concerns in Canada, and IGM Financial Inc. (IGM; senior debt rated A (high)), one of the largest mutual fund complexes in Canada.

The Company’s business strategy consists of taking long-term investment positions in a limited number of well-positioned business franchises that are self-sustaining from a capital perspective. Part of the free cash flow that these investments yield correspondingly passes through to the Company in the form of a steady stream of dividends, which in turn support the creditworthiness and debt service ability of the Company. Acquisitions, when they occur, are targeted at reinforcing existing market positions, rather than expanding into unfamiliar business lines or geographical markets. GWO’s acquisition of Irish Life in July 2013, for example, represents an increased investment in Ireland where the firm already had a presence.

The Company’s investments are presently focused on the manufacture and sale of insurance, protection and wealth management products in its major subsidiaries for both individuals and groups across chosen geographies. Within the individual retail markets, the Company is primarily exposed to the financial advice-giving channel, consisting of career agents and consultants, independent financial advisors and brokers.

The Company’s almost 30% indirect equity interest in Pargesa, a Geneva-based holding company, provides some additional geographic and industry diversification. While Pargesa does pay a small dividend, which is normally passed through to the Company, it is primarily managed to maximize net asset value over the long term.

PWF is majority owned by Power Corporation of Canada (POW; Senior Debt rated A (high)). POW and the POW group of companies (the Group) is controlled by the Desmarais family and managed by an inner circle of long-serving professional managers. DBRS notes that the Group includes a large, multi-level ownership structure, the complexities of which can introduce risks in governance and consequently overall stability if not run very well. While there is no evidence that control, governance and succession issues are a cause for concern (on the contrary, the financial results for the Group and its shareholders are consistently excellent), such issues can be a challenge for closely held groups.

The Company’s financial leverage has been maintained at a reasonable level for the past ten years. The Company’s capitalization remains conservative and the fixed charge coverage ratios are similarly strong relative to both earnings and cash flow. Liquidity is not a source of concern, with about $800 million in cash and short-term securities at the holding company at June 30, 2014, in addition to stores of liquidity at both GWO and IGM.

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

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 has been endorsed by DBRS Ratings Limited for use in the European Union.

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