DBRS Confirms Both CI Financial Corp. and CI Investments Inc. at A (low) with Stable Trends

DBRS Limited (DBRS) has today confirmed both the Senior Unsecured Debentures of CI Financial Corp. (CI or the Company) and the Issuer Rating of CI Investments Inc. (CII) at A (low). All trends are Stable.

The Issuer Rating of CII reflects its contribution to CI as it is the holding company’s major operating subsidiary, housing the mutual fund manufacturing operation and representing more than 95% of consolidated CI earnings. The rating of CI’s Senior Unsecured Debentures reflects the rating of CI as the parent of CII, with the CI rating equalized with CII’s Issuer Rating as a result of the absence of structural subordination.

The primary driver of the ratings is the Company’s strong presence in the Canadian asset management industry where CI calculates that it has an 8% market share (as at September 30, 2016) and $150 billion in fee-earning assets, enabling good economies of scale. CI further benefits from a strong and diversified distribution model, a well-recognized brand, as well as good fund performance with a good track record over a number of years. CI’s assets under management have continued to grow in 2016 through investment gains and acquisitions, while net outflows continue to increase, adversely impacting earnings. The Company benefits from strong and stable cash flows ($160 million in free cash flow at Q3 2016) that, combined with low debt levels (0.8 times Debt-to-EBITDA ratio at Q3 2016, as calculated by DBRS), easily cover debt obligations and reduce concern over the high dividend payout ratio and negative net tangible equity. DBRS views CI’s performance as good on both business strengths and financial metrics, resulting in its investment-grade rating.

The Stable trend reflects CI’s strong fundamental characteristics, especially its reputable franchise. The Company has managed to maintain its operating margins, even in the current challenging environment. Concerns remain, however, that increased competition from other wealth management service providers and products may continue to pressure the business model, market share and margins, negatively impacting earnings. Although fund performance has been good, concerns remain over loss of market share resulting from flows migrating to competitors offering lower fees and/or a better value proposition. DBRS will be carefully monitoring net asset flows for signs of improvement, as the recent trend of negative net sales ($3.3 billion at 9M 2016), if continued for a sustained period of time, can result in a weakening of DBRS’s credit opinion of the Company.

RATING DRIVERS

CI’s ratings may benefit from a significant, successful expansion of the business, an increase in assets under management or from sustained positive net asset flows. Conversely, factors with potential negative implications include a material and sustained loss of market share, impairment of goodwill and intangibles, a degradation of debt coverage metrics or sustained negative net asset flows.

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 on the issuer page at www.dbrs.com.

The applicable methodologies are Rating Companies in the Asset Management Industry (December 2015), and DBRS Criteria: Rating Holding Companies and Their Subsidiaries (January 2016), which can be found on our website under Methodologies.

Lead Analyst: Stewart McIlwraith
Rating Committee Chair: Roger Lister

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.