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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Debentures rating of Power Financial Corporation (PWF or the Company) at AA (low), along with the Non-Cumulative First Preferred Shares and Cumulative First Preferred Shares (Series A) ratings at Pfd-1 (low). All trends remain Stable. The Company’s ratings are 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) by DBRS), one of the three largest life insurance concerns in Canada, and IGM Financial Inc. (IGM; Senior Debt rated A (high) by DBRS), one of the largest mutual fund complexes in Canada as measured by long-term assets under management (AUM).

These two interests, accounting for more than 90% of the Company’s earnings, dividends and asset value, are a source of stable recurring earnings and cash flow. Under the strategic leadership of the Company, both GWO and IGM have become increasingly diversified as they have grown, both organically and by acquisition. The Company has correspondingly increased its exposure to the wealth management business in all of its chosen geographies. Both of these subsidiaries in turn benefit from the Company’s hands-on governance and risk-averse culture.

PWF’s ratings currently reflect the ratings of its most highly rated subsidiary, GWO. Should GWO be upgraded, PWF could also benefit. Conversely, a material increase in unconsolidated financial leverage giving rise to deterioration in coverage ratios; any deterioration in the creditworthiness of a major operating subsidiary, particularly a downgrade of the rating of GWO; a shift in the Company's risk profile resulting from a major divestiture or acquisition; or evidence of governance and control difficulties could have negative rating implications.

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 yielded by these investments correspondingly passes through to the Company in the form of a steady stream of dividends, which in turn supports 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 Assurance plc, for example, represented 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 as well as 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 believes strongly that there is a large retail market for financial advice, given the growing requirement to fund retirement savings pools as the baby boomer generation matures and government sources of financial protection come under funding pressures. Correspondingly, one of the Company’s core operating strengths is its expertise in managing these sorts of distribution and sales channels; however, the relatively high costs of the retail mutual funds products provided through these distribution channels are coming under the scrutiny of legislators, regulators and retail investors. The Company, therefore, faces some challenges in maintaining organic sales growth in its subsidiaries using current distribution models. Fund performance is also very important for attracting new clients and AUMs.

PWF is majority-owned by Power Corporation of Canada (POW; Senior Debt rated A (high) by DBRS). 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 and the financial results for the Group remain very sound, such issues can be a challenge for closely held groups. The Company has a Related Party and Conduct Review Committee composed of independent members of the board, which oversees many of these risks.

The Company’s indirect equity interest in Pargesa Holding S.A. (Pargesa), a Geneva-based holding company, provides some modest additional geographic and industry diversification. Pargesa indirectly holds investments in European industrial companies (i.e., oil and gas, alternative energies, energy, environmental services, water and waste services, mineral-based specialties for industries, cement, aggregates and concrete, wines and spirits as well as testing, inspection and certification services). While Pargesa does pay a dividend which is normally passed through to the Company, providing a small contribution to PWF’s cash flow, it is primarily managed to maximize net asset value over the long term and has a dividend growth objective.

The Company’s financial leverage has been maintained at a reasonable level for the past ten years. The Company’s capitalization remains conservative at the end of June 2015.

Debt service coverage ratios are similarly strong. Specifically, in addition to substantial liquidity held at both GWO and IGM, the Company had about $900 million in cash and short-term securities at June 30, 2015. Such retention of liquid assets in the current uncertain economic environment reflects a unified and consistent approach to risk management across the organization. Financial flexibility is additionally enhanced by proven access by the Company and its investee companies to capital-market funding.

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 methodologies include Rating Companies in the Canadian Life and Health Insurance Industry (January 2015), Rating Companies in the Asset Management Industry (January 2015), Rating Holding Companies and Their Subsidiaries (January 2015) and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.