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

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

CII’s Issuer Rating 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 the Company’s consolidated earnings. CI’s Senior Unsecured Debentures rating is equalized with CII’s Issuer Rating, reflecting the lack of structural subordination between the operating subsidiary and CI.

In confirming the ratings, DBRS considered the Company’s strong presence in the Canadian asset management industry where CI calculates that it has a 9% market share (as at September 30, 2017) and $162.5 billion in fee-earning assets (assets under management and administration), enabling the realization of scale economies. The Company continues to generate excellent profitability, with a 9M 2017 return on equity of 29.5%. CI further benefits from a strong and diversified distribution model, a well-recognized brand and good fund performance with a good track record over a number of years.

On October 2, 2017, the Company finalized its acquisition of Sentry Investments (Sentry), a transaction that is expected to increase total assets under management (AUM) by approximately $20 billion, while also increasing CI’s overall scale. DBRS views the transaction as positive, reflecting CI’s proven track record of successful integration of past acquisitions.

CI’s AUM have continued to grow in 2017 through strong market performance effects and acquisitions while net outflows moderately improved, remaining slightly negative for 9M 2017. The Company is currently experiencing higher debt levels (1.22 times (x) debt-to-EBITDA ratio at Q3 2017, as calculated by DBRS). CI benefits from a good cash flow generation capability ($462 million of operating cash flow for 9M 2017), reducing concern over the high dividend payout ratio and negative net tangible equity. DBRS views CI’s performance as good on business strength and financial metrics, resulting in its investment-grade rating.

In general, the asset management industry is facing structural headwinds from the growing popularity of lower-cost investment alternatives, including index funds and exchange-traded funds, as well as increasing regulatory requirements that emphasize fee transparency and client communication. CI, as a traditional asset manager, faces possible disruption of its business model, especially if it is unable to justify higher fees for its active product offering as a result of poor fund performance. DBRS believes that CI is in a suitable position to handle an increasing regulatory burden, given its large size and scale.

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 market share and margins, negatively affecting earnings. Although fund performance has been good, concerns remain over loss of market share resulting from flows migrating to competitors that are offering lower fees and/or a better value proposition.

RATING DRIVERS
Negative ratings pressure could result if the Company were to experience a material and sustained loss of market share in long-term mutual fund AUM, a significant weakening of debt coverage metrics or a disruption of its advisor-based distribution channels. Ratings may also be negatively impacted if sustained negative net flows begin to materially impact AUM. While positive rating pressure is unlikely in the medium term, given the current rating level and the risk of disruption facing the mutual fund manufacturing and distribution model, any upside would require sustained significantly positive net asset flows contributing to a material increase in AUM and market share resulting from the successful execution of strategic plans and the expansion of distribution channels.

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.

The principal methodologies are Rating Companies in the Asset Management Industry (December 2016), and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (December 2017), which can be found on our website under Methodologies.

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.