DBRS Places GMP Capital Inc. Under Review with Negative Implications Following Announcement of Fundamental Restructuring

DBRS Limited (DBRS) has today placed the Cumulative Preferred Shares rating of Pfd-3 (low) for GMP Capital Inc. (GMP or the Company) Under Review with Negative Implications. This review follows GMP’s announcement that it is undertaking a series of fundamental organizational changes in its Capital Markets division which have the potential to have an impact on the Company’s franchise positioning and further weaken its earnings generation ability.

GMP announced that it will close its offices in the United Kingdom and Australia, streamline its franchise in Canada and reduce staffing for its U.S. Energy businesses. This reorganization is in response to permanent structural and regulatory changes across the industry, which have been taking shape for some time, as well as persistently challenging market conditions. The organizational changes, including restructuring initiatives announced in November 2015, will result in a 25% reduction in head count from Q3 2015 levels and annualized expense reductions of approximately $40 million. GMP reported it will record an after-tax restructuring charge of around $15 million in Q4 2015. In addition, the Company’s board of directors has decided to suspend its quarterly common share cash dividend.

The review will focus on the impact that this reorganization will have on the Company’s business positioning, given the closure of the international offices and the streamlining of its franchise in Canada. While GMP has made a significant investment in its U.S. Energy business, the review will also consider the impact of its head count reductions on this business and the potential for the Company to lose ground relative to larger peers who have more resources to adapt and invest during this sustained downturn in the energy markets.

During the review period, DBRS will also focus on the ongoing weakness in the Company’s earnings. While GMP’s intention is to improve earnings over the longer term by reducing fixed costs in its expense base, the near- to medium-term results will likely be pressured by the very adverse market environment, given the challenges posed by the dramatic decline in oil and gas prices, especially if the Company’s franchise position is weakened during its restructuring. GMP’s Q4 2015 results will be affected by the restructuring charge, and DBRS expects that the Company will report a loss in the quarter and for the full year 2015. DBRS will evaluate the size of the loss and impact on capital following the release of results.

The severity of a downgrade will consider various factors during the review period. These factors include the Company’s vulnerability to the uncertain economic outlook and market conditions, the degree to which its franchise strength has been impaired, the sufficiency and quality of its capital, and the potential for it to return to sustained profitability.

DBRS expects to conclude its review shortly after the release of GMP’s Q4 2015 results.

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 are the Global Methodology for Rating Banks and Banking Organisations (December 2015), Preferred Share and Hybrid Criteria for Corporate Issuers (January 2016) and Rating Holding Companies and Their Subsidiaries (January 2016). These documents can be found on DBRS’s website at www.dbrs.com.