DBRS Changes Trends of CI Financial Corp. and CI Investments Inc. to Stable, Confirms Ratings at BBB (high)
Funds & Investment Management CompaniesDBRS Limited (DBRS) changed the trends on CI Financial Corp. (CI or the Company) and its principal subsidiary, CI Investments Inc. (CII), to Stable from Negative. DBRS also confirmed CI’s Senior Unsecured Debentures rating and CII’s Issuer Rating at BBB (high).
KEY RATING CONSIDERATIONS
The trend change to Stable from Negative reflects the stabilizing of the Company’s debt-to-EBITDA ratio to a level below 2.5 times (x). While elevated from historical levels, the Company’s good earnings and cash flow generation enable it to adequately service its debt. In revising the trend, DBRS is making the assumption that debt levels are not expected to increase significantly from their current level of approximately $1.6 billion and that CI will not be financing future share buyback activity with the issuance of material amounts of additional debt.
The confirmation of the ratings at BBB (high) takes into consideration CI’s strong market share in the Canadian asset management industry. CI’s scale enables it to compete effectively among peers and positions it well within the mature asset management landscape in Canada, where consolidation of both manufacturers and distributors is taking place. CI’s large assets under management (AUM) base is a consistent source of fee-based revenues, generating enough cash flow to service its debt obligations while maintaining high return on equity values. DBRS views positively the Company’s steps to adapt to changing market conditions through investing in digital technology and distribution and enhancing its product suite. Some concerns remain about the Company’s reduced financial flexibility regarding its elevated debt levels as well as the persistence of high levels of redemptions of its funds. While earnings remain strong and have not yet been materially impacted by the current environment of declining asset management fees, high debt levels leave the Company vulnerable to a potential scenario of declining fees coupled with a rapid decline in its AUM base.
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 increase to levels commensurate with a lower rating, resulting in a deterioration of its financial flexibility. A material and sustained loss of market share in long-term mutual fund AUM or 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. A sustained increase in free cash flow may also positively pressure ratings.
RATING RATIONALE
CI’s ratings are underpinned by its strong franchise in Canada, where it ranks among the largest non-bank asset managers. CI has consistently demonstrated good gross sales, enabled by its strong and diversified distribution. The Company is experiencing growth in its Asset Administration segment even as it continues to experience a high rate of redemptions in its Asset Management business. Despite net redemptions, CI has managed to grow its AUM in recent years through acquisitions and market appreciation. CI is attempting to return to positive net sales partly by enhancing its product suite to include more active exchange-traded funds and offerings geared toward the high-net-worth investor as well as by further investing in its distribution networks.
Commencing in Q3 2018, CI has been pursuing an aggressive strategy to buy back shares of up to $1 billion over 12 months to 18 months, partially mitigated by a reduction in its dividends. The share repurchase strategy has been driven by CI management’s belief that its stock is undervalued. So far, since July 2018, CI has repurchased 25 million shares for $506 million. In June 2019, the Company received approval to repurchase an additional 22 million shares, a course of action the Company intends to continue with, depending on its stock price as well as other investment opportunities. DBRS expects the remaining share repurchases to cost approximately $440 million, depending on the stock price at the time of repurchase, and for the repurchases to be funded largely by free cash flow rather than debt. The Company has indicated that it intends to remain below a net debt-to-EBITDA ratio of 2.0x, which is roughly equivalent to gross debt levels of $2 billion, assuming that EBITDA remains stable. Following the recent issuance of $350 million of senior debentures in July 2019, most of which will be used to pay down the balance on its existing credit facility, CI’s gross debt is currently at approximately $1.6 billion, per DBRS calculations.
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. Indicative of CI’s weakening financials, the Company’s debt-to-EBITDA ratio was 2.05x as at Q2 2019, up from 1.68x for 2018 and 1.29x for 2017. Although CI continues to generate stable earnings and good cash flow, its debt-servicing capacity is declining with its rising debt levels. 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. Although the Company is currently able to comfortably cover its debt-servicing payments, there is the risk that a stressed market environment and continued fee pressure could lead to significantly less free cash flow, further reducing financial flexibility.
Notes:
All figures are in Canadian dollars unless otherwise noted.
The applicable methodologies are Rating Companies in the Asset Management Industry (December 2018) and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (November 2018), which can be found on our website under Methodologies & Criteria.
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 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.
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