DBRS Morningstar Places Ratings on CI Financial Corp. and CI Investments, Inc. Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) placed the BBB (high) ratings on CI Financial Corp.’s (CI or the Company) Senior Unsecured Debentures and its principal subsidiary, CI Investments Inc.’s (CII), Issuer Rating Under Review with Negative Implications.

DBRS Morningstar assessed these ratings under its “Global Methodology for Rating Investment Management Companies” (January 21, 2020), which replaced the prior “Rating Companies in the Asset Management Industry” methodology.

KEY RATING CONSIDERATIONS
In placing the ratings under review, DBRS Morningstar considers recent market declines and volatility resulting from the ongoing Coronavirus Disease (COVID-19) pandemic. Assets under management (AUM) have materially declined in the current market environment from both market declines, as well as redemptions. The magnitude of recent equity market declines is significant and will likely have a direct impact on the Company’s cash flow. A sustained reduction in CI’s total AUM would put pressure on earnings and reduce the Company’s free cash flow (FCF) as fee-based revenues on managed assets comprise the majority of CI’s revenue. It is important to note that a decline in AUM resulting from recent market declines is not by itself a cause of the review, rather it is the reduction in financial flexibility resulting from the pre-existing high debt levels at the Company combined with a persistent trend of negative net sales. In placing the ratings under review, DBRS Morningstar will be assessing what level of cash flow and profitability the Company can deliver in today’s adverse operating environment while maintaining sufficient financial flexibility. DBRS Morningstar expects to resolve the Under Review status within 90 days. While the outcome of the Under Review period is uncertain, any negative rating action will likely be limited to a one-notch downgrade.

RATING DRIVERS
Although positive ratings action is unlikely in the near term given current market conditions, a material reduction in the Company’s leverage or success in reducing redemptions relative to gross sales may lead to positive ratings pressure. A sustained increase in free cash flow may also positively pressure ratings. Conversely, CI’s inability to mitigate or reverse the recent material loss of AUM combined with continued net outflows will likely lead to a negative ratings action. Ratings are also likely to be negatively pressured if CI’s debt leverage increases further to levels commensurate with a lower rating, resulting in a deterioration of its financial flexibility.

RATING RATIONALE
The Company’s financial flexibility is currently under pressure as a result of declining cash flows from lower AUM and increased debt levels. CI had $1.6 billion of gross debt at YE2019, resulting in a debt-to-EBITDA ratio of 2.0 times (x), up from 1.7x in the prior year. Similarly, its interest coverage ratio declined to 14.1x at YE2019 from 20.6x at YE2018. As the current market conditions continue, these ratios will likely deteriorate further, putting pressure on the Company’s financial metrics that would be commensurate with a lower rating category.

In the past 1.5 years, CI has pursued an aggressive share-repurchase strategy, driven by management’s belief that its stock is undervalued. Share buybacks and dividends continue to exceed FCF, picking up pace again after slowing down in Q1 and Q2 2019. DBRS Morningstar notes that the proceeds of the Company’s increased debt appear to be largely absorbed by share capital repurchases and dividend payments. While CI’s debt levels and financing costs are manageable during stable market environments when cash flows are relatively predictable, risk increases and financial flexibility weakens during periods of heightened volatility and uncertainty.

The rating actions consider CI’s strong market share in the Canadian asset management industry. The Company’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. Over the years, CI’s sizable AUM base has been a consistent source of fee-based revenues, generating enough cash flow to service its debt obligations while maintaining high returns on equity. DBRS Morningstar views positively the Company’s steps to adapt to changing market conditions through investing in digital technology and distribution as well as enhancing its product suite. CI has also been proactive in responding to the coronavirus as management takes the appropriate steps to maintain business continuity and mitigate the flow of redemptions during this time.

CII’s Issuer Rating reflects its role as CI’s major operating subsidiary, housing the mutual fund manufacturing operation and representing more than 95% of the Company’s consolidated earnings. DBRS Morningstar’s rating on CI’s Senior Unsecured Debentures is equal to CII’s Issuer Rating, reflecting the lack of structural subordination between the operating subsidiary and CI.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Investment Management Companies (January 21, 2020).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.dbrsmorningstar.com.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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