DBRS Morningstar Confirms CI Financial Corp. and CI Investments, Inc. at BBB (high), Negative Trend

DBRS Limited (DBRS Morningstar) confirmed the ratings of CI Financial Corp. (CI or the Company) and its principal subsidiary, CI Investments Inc. (CII), including CI’s Senior Unsecured Debentures rating and CII’s Issuer Rating at BBB (high). The trend is Negative for all ratings. With this rating action, DBRS Morningstar has removed the ratings from Under Review with Negative Implications, where they were placed on March 27, 2020.

KEY RATING CONSIDERATIONS
The Negative trend considers CI’s continued net outflows of assets under management (AUM) due to a persistently high rate of redemptions relative to gross sales, with the risk that this trend may accelerate in the current market environment as a result of the ongoing Coronavirus Disease (COVID-19) pandemic and the associated economic impact. While AUM is still sizeable and the Company has strong revenues and EBITDA, fee-based assets comprise the majority of CI’s revenues and further declines in AUM will put increasing pressure on the Company’s cash flow. AUM was $121 billion as at the end of May 2020, recovering from its end-of-March value of $111 billion, but lower than the YE2017 level of $143 billion. Increasing debt levels in the past few years, used largely to fund share repurchases, have also led to reduced financial flexibility.

The rating confirmation reflects CI’s strong market share in the Canadian asset management industry as a leading nonbank affiliated fund company. CI’s scale enables it to compete effectively among its peers and positions it well within the mature asset management landscape in Canada, where consolidation of both manufacturers and distributors is taking place.

In March 2020, ratings were placed Under Review with Negative Implications. Due to steep market declines and high volatility, there was the risk that free cash flow may decline significantly at the same time that debt maturities come due later in the year ($450 million due in December 2020). This risk is now mitigated by the fact that CI pre-emptively issued debt in May 2020 to account for the upcoming maturity, as well as by the Company’s contingent liquidity resources, including a $700 million credit line (undrawn at the end of May).

RATING DRIVERS
Although an upgrade is unlikely in the near term given the Negative trend, a material reduction in the Company’s leverage or success in reducing redemptions relative to gross sales resulting in higher revenues would lead to positive rating pressure. A sustained increase in free cash flow may also positively pressure the rating. Conversely, the rating would be downgraded if CI’s debt leverage increases further to levels commensurate with a lower rating, resulting in a deterioration of its financial flexibility. A sustained, material decline in AUM combined with continued net outflows would also lead to a downgrade.

RATING RATIONALE
The Company’s financial flexibility is currently under pressure as a result of increased debt levels. Debt levels are currently temporarily elevated due to the issuance of $450 million in senior debentures in May 2020 and are expected to decline as the Company repays its upcoming debt maturity in December 2020 of the same amount. The Company’s debt-to-EBITDA ratio has shown an increasing trend in the past few years, reaching 2.2 times (x) as at Q1 2020 with debt of $1.75 billion. Comparatively, CI had $1.60 billion of debt as at YE2019, with a debt-to-EBITDA ratio of 1.8x. As the current market volatility continues, there is the possibility that these metrics may deteriorate further, becoming commensurate with a lower rating category. 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 the Company’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 Company’s current cash flow is strong and sufficient to pay financing and operational expenses but may come under increasing pressure due to a persistently high level of redemptions relative to gross sales, increasing fee pressure, and any further market declines. Offsetting some of the risks in the Company’s financial profile are CI’s low level of risky assets on its balance sheet, resulting in low market risk, and its good management of liquidity risk.

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, enhancing its product suite, making strategic acquisitions, and increasing operational efficiencies. CI has also been proactive in responding to the coronavirus pandemic, with management taking the appropriate steps to maintain business continuity and mitigate the flow of redemptions during this time.

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.

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), which can be found at https://www.dbrsmorningstar.com/research/355764/global-methodology-for-rating-investment-management-companies.

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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577