DBRS Assigns an Issuer Rating of “A” to Power Corporation of Canada, Confirms Other Ratings with Stable Trends

DBRS Limited (DBRS) assigned an Issuer Rating of “A” to Power Corporation of Canada (POW or the Company). DBRS also confirmed POW’s Senior Debt rating at “A” and Non-Cumulative First Preferred Shares and Cumulative Redeemable First Preferred Shares, 1986 Series ratings at Pfd-2. All trends are Stable. DBRS’s rating assessment of POW is largely derived from the Company’s 65.6% equity interest in Power Financial Corporation (PWF; rated A (high) with a Stable trend by DBRS), which, in turn, has controlling interests in Great-West Lifeco Inc. (GWO; rated A (high) with a Stable trend by DBRS) and IGM Financial Inc. (IGM; rated A (high) with a Stable trend by DBRS), two of Canada’s largest financial institutions and leaders in their respective industries. Since GWO is the greatest contributor to the earnings and overall strength of PWF and, consequently, POW, DBRS’s “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations” is the primary methodology for rating POW.

The ratings for POW are one notch below PWF’s ratings under the holding company criteria because of structural subordination. Additionally, PWF’s Issuer Rating has been set at the same level as GWO’s Issuer Rating of A (high). For more information, see the press releases “DBRS Confirms Ratings of Power Financial Corporation at A (high) and Pfd-2 (high)” published on November 29, 2017, and “DBRS Confirms Ratings of Great-West Lifeco Inc. and Affiliates” published on November 20, 2017.

POW is a corporate holding company controlled by the Desmarais family, with PWF as its major holding (DBRS calculates that PWF comprises 83% of POW’s net asset value). Through PWF, POW is indirectly invested in GWO, one of the three largest life insurance companies in Canada; IGM, a leading Canadian asset manager; and Pargesa Holding SA, a Swiss holding company with indirect interests in various largely European-based global companies through Groupe Bruxelles Lambert. Aside from PWF, POW’s other interests include Sagard Investment Funds (equity investment funds focused in Europe, the United States and China); Power Energy (renewable energy); Square Victoria Communications Group Inc. (media); and other investments, including a 13.9% interest in China Asset Management Co., Ltd. (CAMC), a Chinese asset management company (IGM Financial Inc., rated A (high) by DBRS, owns an additional 13.9% interest in CAMC). These investments have grown in value, although they are currently not contributing meaningfully to net earnings for the Company. Management’s value-oriented investment approach, in addition to the Company’s active shareholder interests, are expected to create additional shareholder value over time. The Company’s strategy of having significant interests in the majority of its investments allows it to contribute meaningfully to their management and influence any strategic decisions.

The large proportion of earnings from GWO and IGM exposes the Company to the advice-centred distribution model of protection and wealth management products and services. The Company is cognizant of the emerging issues and challenges in the financial services industry presented by the low-interest-rate environment, increasing regulatory requirements, disruptive technological forces and higher customer expectations. To counter these emerging risks, POW is investing broadly in digital capabilities throughout its operating subsidiaries to enable them to modernize and adapt to the changing environment. The Company is confident in its long-term strategic vision of being the leading financial services provider in the markets in which it participates.

As the controlling shareholder of PWF and, by extension, GWO and IGM, POW defines the strategic vision for its financial services companies while setting the tone from the top in terms of conservative management style and risk tolerance. In turn, the Company’s subsidiaries benefit from this active oversight and the ability to leverage the benefits of being part of a large global organization. Such benefits include the sharing of expertise and the cross-selling of products across the various subsidiaries. Facilitating the execution of this strategy, 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.

DBRS views POW as benefiting from a strong capital position, high liquidity and prudent decision making. On a stand-alone basis, POW’s financial profile is conservative. Financial leverage, as measured by debt plus preferred shares-to-capital, is low at 10.8% (as at September 30, 2017) and is mainly used to fund a portfolio of cash and short-term investments as well as a modest level of working capital. The Company’s interest payments on its Senior Debt and dividend obligations on its perpetual preferred shares are well covered (7.1 times as at the nine months ended September 30, 2017 (9M 2017)) on a cash basis. The Company’s liquidity is strong, with $496 million in cash and short-term securities as at September 30, 2017 ($819 million as at September 30, 2016). At 10.9%, 9M 2017 return on equity is comparable with historical returns, although there is some pressure on earnings resulting from slower organic growth because of the mainly mature markets in which the Company participates.

RATING DRIVERS
Negative rating pressure may arise from a downgrade of PWF’s or GWO’s ratings, a significant deterioration in earnings and/or prolonged distress at any of its major operating subsidiaries or a sizable shift in the Company’s risk profile resulting from a major divestiture or acquisition. POW’s ratings could also be negatively affected by evidence of governance and control issues. Conversely, an upgrade of PWF could potentially benefit POW’s ratings.

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 DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (December 2016), Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2016) and Rating Companies in the Asset Management Industry (December 2016), which can be found on our website under Methodologies. In addition, DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2016) was used to assess the preferred shares.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Stewart McIlwraith, Senior Vice President, Head of Insurance - Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings

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.

For more information on this credit or on this industry, visit www.dbrs.com.