DBRS Places Ratings of CI Financial Corp. and CI Investments Inc. Under Review with Negative Implications

DBRS Limited (DBRS) placed the Senior Unsecured Debentures rating of CI Financial Corp. (CI or the Company) and the Issuer Rating of CI Investments Inc. (CII) Under Review with Negative Implications.

CII’s Issuer Rating reflects its role in CI as 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.

The rating actions reflect DBRS’s concerns over CI’s growing long-term debt levels, which have been accompanied by large drawdowns on CI’s credit facility, as evidenced during Q1 2018. The Company’s debt-to-EBITDA ratio was 1.50 times (x) as at Q1 2018, up from 1.29x as at Q4 2017 and 0.98x as at Q1 2017. DBRS notes that the current ratio level is now commensurate with a lower rating category. In consequence, there has been ongoing deterioration in leverage and coverage ratios. While operating cash flow generation remains good, DBRS notes that general expenses, share capital repurchases and dividend payments, rather than investment in the Company’s operations, appear to be absorbing the proceeds of the increased debt. The Company repurchased $156 million of common shares in Q1 2018 compared with $73 million in Q1 2017. Although CI continues to generate stable earnings, its debt-servicing capacity is deteriorating with its rising debt levels. CI also faces a reduction in its financial flexibility. The persistence of net outflows of assets under management (AUM) at the Company is also a concern from DBRS’s perspective, as Q1 2018 marked the ninth consecutive quarter in which redemptions outpaced gross sales. Fee-based revenues on managed assets comprise the majority of CI’s revenue and, consequently, its earnings. DBRS’s review will focus on the Company’s plans for its financial profile and the trajectory of its key financial metrics in the context of CI’s overall business development. The Company’s strategy to combat net outflows will also be reviewed.

RATING DRIVERS
The ratings could be downgraded if CI’s debt levels continue to increase and its debt coverage ratios deteriorate to levels commensurate with a lower rating category. Increased use of the credit facility to fund non-investment activities would also be viewed unfavourably, especially when combined with continued net outflows of AUM. Conversely, the ratings could be confirmed at the current level if the Company demonstrates a material reduction in leverage and a reduced dependence on its credit facility.

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 (January 2018), 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.