DBRS Downgrades CI Financial Corp. and CI Investments Inc. to BBB (high) with a Negative Trend

DBRS Limited (DBRS) downgraded the rating of the Senior Unsecured Debentures issued by CI Financial Corp. (CI or the Company) and the Issuer Rating of its principal subsidiary, CI Investments Inc. (CII), to BBB (high) from A (low). All trends have been changed to Negative.

The downgrades reflect DBRS’s concerns that CI’s growing debt levels have led to deterioration in the Company’s financial flexibility as indicated by its leverage and fixed-charge coverage ratios. DBRS notes that the proceeds of the Company’s increased debt appear to be absorbed by share capital repurchases and dividend payments rather than by investment in the Company’s operations. CI is pursuing an aggressive strategy to buy back shares of up to $1 billion over the next 12 months to 18 months, partially mitigated by a recent reduction in its dividends. The plan to buy back more shares follows recent repurchases, including $156 million in Q1 2018 and $153 million in Q2 2018. Although the Company is currently able to comfortably cover its debt-servicing payments due to good market performance overall, there is the risk that a stressed market environment leading to a decline in assets under management (AUM) may result in declining revenues.

The Negative trends reflect the deteriorating trend in the Company’s financial flexibility and the persistence of redemptions exceeding gross sales at the Company. This persistence could pressure earnings as fee-based revenues on managed assets comprise the majority of CI’s revenue.

Indicative of CI’s weakening financials, the Company’s debt-to-EBITDA ratio was 1.56 times (x) as at Q2 2018, up from 1.29x as at Q4 2017 and from 1.04x as at Q2 2017. DBRS notes that this new level is now commensurate with a lower rating category. Although CI continues to generate stable earnings and good cash flow, its debt-servicing capacity is declining with its rising debt levels. There are concerns about the amount of dividends and share buybacks being paid out to shareholders. This amount also continues to materially exceed net income and free cash flow, as was evidenced in the last three quarters. By reducing its equity capital and increasing debt, CI is reducing its financial flexibility.

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

RATING DRIVERS
Ratings are likely to be negatively pressured if CI’s debt levels continue to increase or if its debt-coverage ratios deteriorate to levels commensurate with a lower rating. Continued net outflows of AUM may also negatively pressure ratings. Conversely, there could be positive ratings pressure if the Company demonstrates a material reduction in leverage or shows success with its ability to improve the volume of redemptions relative to gross sales.

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 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 dbrs.com 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 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.