DBRS Assigns Crown Capital Partners Inc. Long-Term Issuer Rating of BB (low), Stable Trend

DBRS Limited (DBRS) assigned Crown Capital Partners Inc. (CCP or the Company) a Long-Term Issuer Rating of BB (low). The trend on the rating is Stable. The Support Assessment is SA3, which reflects the expectation of no timely external support and results in a final rating that is equivalent to the Intrinsic Assessment (IA).

KEY RATING CONSIDERATIONS
The rating reflects CCP’s business model of being a niche player in the commercial lending space with a solid track record over the last 17 years with minimal credit losses. CCP is run by an experienced senior management team, which has established a well-articulated strategy for the Company. However, these positive factors are tempered by CCP’s lack of scalability and significant concentration in its portfolio on both the energy sector and Alberta. Furthermore, CCP’s relatively high dividend payout results in lower retention of earnings, which limits the Company’s ability to grow capital organically. In addition, DBRS sees a high degree of key man risk with CCP, given the importance of the founders of the Company to the day-to-day operations of CCP. DBRS would view the expansion of the senior management team positively.

RATING DRIVERS
Over the medium term, DBRS sees the potential for positive rating pressure should CCP significantly build scale and diversification of earnings, while maintaining a strong track record. In addition, evidence of CCP’s ability to successfully navigate an economic downturn or other significant challenges could also benefit the rating.

Given that CCP lacks the scale necessary to support sustainable and diversified earnings, any material losses that drive increased leverage and impair the franchise could have negative rating pressure. In addition, DBRS sees negative rating pressure if losses in CCP’s portfolio were to consume significant time and effort of senior management, which would thereby limit CCP’s growth opportunities. Furthermore, should leverage increase significantly due to a change in CCP’s structure through direct lending, ratings could come under negative pressure.

RATING RATIONALE
Founded 17 years ago, CCP is a Canadian-based specialty finance company that is an originator and manager of funds for third-party investors that are focused on lending to Canadian lower and middle market companies. The Company was originally founded by Crown Life Insurance Company to manage its private equity and debt investments. In 2002, CCP was purchased by its senior management team, with the majority of this management team still at the helm of the Company today and actively involved in its day-to-day operations. In July 2015, CCP became a publicly listed company on the Toronto Stock Exchange (TSX) under the symbol CRWN. Following the public listing, CCP adopted a hybrid investor/manager business model whereby it can offer financing solutions directly to clients, in addition to continuing to manage third-party funds. CCP maintains conservative underwriting of its investments, which has contributed to its strong track record of low credit losses. However, DBRS notes that the limited diversification of its portfolio by industry and geography is a rating constraint.

DBRS considers CCP’s earnings power as strengthening. Most of the Company’s revenue consists of interest income, which provides CCP with a stable and predictable cash flow. However, in DBRS’s view, CCP lacks the scale and diversification necessary to support sustainable earnings growth through a potential broad economic downturn or if an industry-specific downturn were to affect a sector(s) in which CCP is most concentrated. While the Company’s earnings are generally acceptable, investments may not perform as expected or loans may be prepaid in advance of maturity dates. Although prepayment fees would be received, these fees are unpredictable and introduce reinvestment risk, which could potentially have an impact on earnings generation.

As a result of the concentration of CCP’s current loan portfolio and the general limited number of investments, DBRS considers the Company’s risk profile as slightly elevated. The Company’s focus on lending to lower and middle market companies also elevates the risk profile as lending to these companies is inherently riskier than lending to large corporates. However, CCP’s exposure to credit risk is minimized given the structure of the third-party investor fund. Under this structure, CCP’s credit risk is reduced given that credit risk is primarily borne by the third-party institutional investors in the fund. Given the hands-on approach of management and the close working relationship they foster with the investee companies, this minimizes portfolio risk. Investee companies are required to complete rigorous reporting requirements, which allows CCP to monitor their financial performance.

DBRS views CCP’s funding and liquidity profile as very narrow, given that the Company is reliant on a $35 million senior secured revolving credit facility with the Alberta Treasury Branches and Business Development Bank of Canada. In 2017, CCP had not drawn down on this credit facility and all funding to date has been sourced from proceeds from the July 2015 initial public offering (IPO).

From DBRS’s perspective, CCP maintains an adequate amount of capital given the risk profile of the business and its earnings profile. As a non-federally regulated lender, CCP is not subject to minimum capital ratios. DBRS views the quality of CCP’s capital as sound since it mainly consists of common equity, which was generated through the July 2015 IPO, and retained earnings.

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 principal methodology is Global Methodology for Rating Finance Companies (November 2017), which can be found on dbrs.com under Methodologies.

Lead Analyst: Robert Colangelo, Senior Vice President, Canadian Banking Financial Institutions
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG

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

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