DBRS Comments on Laurentian Bank’s Northpoint Commercial Finance Acquisition

DBRS Limited (DBRS) has today commented that its ratings for Laurentian Bank of Canada (Laurentian or the Bank), including its Deposits & Senior Debt rating of A (low) with a Stable trend, are unaffected following the Bank’s announcement of a definitive agreement under which its subsidiary LBC Capital has agreed to purchase U.S.-based Northpoint Commercial Finance (NCF or the Company).

NCF, a diversified player in the equipment finance sector with a U.S. and Canadian presence, has a $1.2 billion (USD 0.9 billion) portfolio and specializes in inventory financing sourced through relationships with over 300 manufacturers and 2,000 dealers in eight market segments. As of March 31, 2017, NCF’s average outstanding lines of credit were below $0.5 million (USD 0.4 million) per dealer. Recreational vehicles and marine equipment together represent the majority (around 61%) of the Company’s portfolio, while 2.7% of receivables came from Ontario. DBRS notes that NCF’s annual loss ratio has averaged 19 basis points since its establishment in 2012. While the Company is only a few years old, management has strong industry experience and is expected to stay on post-acquisition, which is expected to close before the end of 2017.

DBRS views the acquisition as consistent with Laurentian’s strategy to create a scalable equipment financing platform through LBC Capital. The NCF acquisition is expected to be accretive to the Bank’s revenue from commercial activities in its first year of operations and is estimated to add approximately 4% to earnings per share by 2019. Based on Q1 2017 figures, the transaction is expected to increase Laurentian’s Business Services portfolio by 12% to $11.3 billion on a pro forma basis, which translates into almost one-third of the Bank’s loan portfolio. In DBRS’s opinion, although increased commercial exposure suggests a modest increase in the Bank’s risk profile, the targeted approach to growing LBC Capital, as well as the increased geographical diversification afforded by this transaction gives some additional comfort.

While the purchase price was not disclosed, the acquisition will be financed on a bought deal basis through the issuance of a $200 million subscription receipts to a syndicate of underwriters and $25 million as a private placement with the Caisse de dépôt et placement du Québec. The subscription receipts, which will be issued at $51.70 per share, will be exchanged for common shares on the closing of the transaction. This is equivalent to about 13.5% of common equity at the end of Q1 2017. Management has indicated that it expects its Common Equity Tier 1 (CET1) ratio to be maintained within its target range of 7.8% to 8.2%. DBRS considers Laurentian’s low CET1 ratio as a constraint on the rating.

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

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