Press Release

DBRS Confirms Ratings on IGM Financial Inc. at A (high) and Pfd-2 (high), Stable Trends

Funds & Investment Management Companies
November 14, 2018

DBRS Limited (DBRS) confirmed the Issuer Rating and Unsecured Debentures rating of IGM Financial Inc. (IGM or the Company) at A (high) and its First Preferred Shares rating at Pfd-2 (high). All trends are Stable. The ratings are primarily based on the profitability, operating cash flow and business strengths of the Company’s collective group of businesses, including IG Wealth Management (IG), Mackenzie Financial Corporation (Mackenzie Investments or Mackenzie) and Investment Planning Counsel Inc.

KEY RATING CONSIDERATIONS
The rating confirmations reflect IGM’s leading market position in the Canadian mutual fund manufacturing and distribution market through the operations of both IG and Mackenzie, with total assets under management (AUM) of almost $160 billion as at September 30, 2018. Its large size allows it to benefit from scale economies. Both Mackenzie and IG provide IGM with strong brand awareness and diversification of earnings streams and distribution channels, which are positive factors for the ratings. While gross sales remain strong in all segments, IGM is challenged to reduce redemption rates at Mackenzie below industry averages. DBRS notes that redemptions at IG remain below the industry average. The Company maintains a conservative financial profile with substantial available liquid resources. Although leverage remains high because of the acquisition of China Asset Management Co. in 2017, DBRS expects this metric to improve to levels supported by the rating as the Company pays down its debt obligations or redeems preferred shares. The Stable trends reflect IGM’s consistent profitability as well as its strong franchise in the Canadian asset management space.

RATING DRIVERS
DBRS notes that the structural challenges of the asset management industry continue to constrain IGM’s rating level. However, positive ratings pressure could emerge if the Company materially improves its overall institutional sales capabilities and fund performance at both IG and Mackenzie. Conversely, negative ratings implications could result from sustained net fund outflows, materially affecting the Company’s profitability and financial strength through a diminished AUM base. Negative ratings pressure may also arise if the Company no longer benefits from its affiliated relationships within the Power group of companies or experiences a degradation of debt metrics above 2.5 times for the debt plus preferred shares to EBITDA ratio.

RATING RATIONALE
When confirming the ratings, DBRS considered IGM’s consistently healthy levels of operating cash flow and strong profitability metrics, including a 9M 2018 return on common equity of 17.3%. The Company’s trend of strong earnings can be attributed to a diversified and expanding product suite, an increasing focus on strengthening distribution channels and an overall redemption rate lower than the industry average.

In order to remain competitive, IG is continually expanding its product shelf by introducing products with a lower management expense ratio (MER) but with additional separate advice fees for transparency. The unbundling of fees is not expected to have a net impact on revenues. At Mackenzie, the decrease in overall fee rate on fund offerings is accompanied by an equivalent reduction in trailer fee expenses and are thus not expected to have a detrimental impact on earnings. The ETF product suite at Mackenzie also continues to expand, while IG is continuing to focus on both the high net worth and mass affluent segments, which currently represent 49% of IG’s AUM as at September 30, 2018.

As a result of its scale, the Company is well positioned to handle an increasing regulatory burden relative to smaller asset managers. DBRS notes that IGM will still need to manage its expense levels prudently to maintain profitability, considering the increasing proportion of assets flowing into high-net-worth solutions that generally command lower fees. To increase efficiencies across the organization, the Company is restructuring its organization to realize cost savings.

IGM benefits from being a strategic part of the Power group of companies through the associated strong governance and risk management model that is reflective of Power subsidiaries. IGM also has a good enterprise risk management framework and well-articulated strategies for all its business lines. The Company is pursuing an advice-centred business model, which, combined with the breadth of its product suite, positions it to compete in the highly contested investment product market.

As the industry faces the ongoing movement of assets from active to passive investment options, fee compression and increasing regulatory requirements, the execution of advisor training and client communication will be important for IGM’s profitability and the sustainability of its business model. In the current challenging environment for traditional asset managers, Mackenzie in particular faces the possibility of sustained net fund outflows, especially if fund performance declines or lags, given its reduced focus on financial planning, which makes AUM less sticky than in the case of IG.

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), DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (December 2017) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2018), which can be found on our website under Methodologies.

Lead Analyst: Marcos T. Alvarez, Senior Vice President – 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.

Ratings

IGM Financial Inc.
  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

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