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

DBRS Limited (DBRS) has today confirmed the Senior Debt as well as the Non-Cumulative First Preferred Shares and Cumulative Redeemable First Preferred Shares, 1986 Series 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 65.6% equity interest in Power Financial Corporation (PWF), which represents a substantial majority of the Company’s earnings and cash flow as well as the vast majority of the Company’s estimated net asset value. 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.

Should PWF be upgraded, then POW could also benefit. Conversely, a shift in the Company’s risk profile resulting from a major divestiture or acquisition, a material increase in financial leverage or increased adoption of double leverage, deteriorating earnings and prolonged distress at the major operating subsidiaries, a downgrade of the rating of Great-West Lifeco Inc. (GWO) or PWF, or evidence of governance and control difficulties could have negative rating implications.

The Company benefits from its position in the advice-centred distribution model of protection and wealth management products and services through its indirect investment in PWF’s major subsidiaries, 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 the Pargesa Holding SA segment of PWF (primarily focused on large European industrial companies), direct investments in media and renewable energy and various equity investment vehicles focused in Europe, the United States and China. 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.

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 as well as 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, combined with the POW group of companies’ (the Group) conservative approach, has served the Company’s stakeholders well.

The Group is controlled by the Desmarais family and is 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 has a Related Party and Conduct Review Committee composed of independent members of the board, which oversee many of these risks.

On a stand-alone basis, POW’s financial profile is conservative and the Company’s liquidity is strong, with over $800 million in cash and short-term securities at the holding company at June 30, 2015, relative to $400 million of debt. DBRS considers the Company’s substantial liquidity to be 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 holding company subsidiaries that are also carrying additional liquidity positions, continuing the theme of a consistent and integrated financial and risk management approach across the organization.

DBRS anticipates that any major new strategic investments would remain consistent with the long-term growth and diversification strategies of the Company. Moreover, DBRS expects that any such acquisitions would 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 that is reflected in its consistent growth in profitability and earnings stability.

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 is 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.