DBRS Morningstar Maintains GMP Capital Inc.’s Under Review with Developing Implications Status

DBRS Limited (DBRS Morningstar) maintained the Under Review with Developing Implications status on GMP Capital Inc.’s (GMP or the Company) Cumulative Preferred Shares rating of Pfd-4 (high). DBRS Morningstar has maintained this status since June 18, 2019, given the lack of clarity on the ultimate composition and financial fundamentals of the Company.

DBRS Morningstar initially placed GMP’s rating Under Review with Developing Implications following the Company’s announcement that it had agreed to sell substantially all of its capital markets business to Stifel Financial Corp. Subsequently, DBRS Morningstar maintained the Under Review with Developing Implications status on September 18, 2019, as the sale transaction had yet to close. The sale transaction was completed on December 6, 2019; however, DBRS Morningstar maintained the Under Review with Developing Implications status again on December 17, 2019, as the Company was still in discussions with Richardson Financial Group Limited (RFGL) to consolidate full ownership of Richardson GMP Limited (Richardson GMP). On February 26, 2020, GMP announced that it had entered into a nonbinding term sheet with RFGL to consolidate the ownership of Richardson GMP. DBRS Morningstar once again maintained the Under Review with Developing Implications status on March 17, 2020, as GMP had called a special meeting of common shareholders on April 21, 2020, to approve the consolidation. Subsequently, DBRS Morningstar maintained the Under Review with Developing Implications status on June 16, 2020, after the contractual negotiation period between GMP and RFGL was extended and GMP postponed the special meeting as a result of concerns over the Coronavirus Disease (COVID-19) pandemic.

On August 13, 2020, GMP announced that it had entered into a definitive purchase agreement with RFGL to consolidate 100% ownership of RGMP under GMP. Under the terms of the agreement, GMP will acquire all common shares of Richardson GMP that it does not already own (65.9% stake) for a purchase price of 1.875 GMP common shares (originally two GMP common shares) per one common Richardson GMP share. Following the impact of the coronavirus pandemic, RBC Capital Markets, LLC (RBC) revised its valuation of Richardson GMP from $500 million to $420 million. Accordingly, they concluded that the common shares now carry a value between $3.55 to $4.50 (previously $4.25 to $5.15) while GMP common shares carry a value of between $2.00 to $2.55 (previously $2.20 to $2.90) on an en bloc basis.

Furthermore, GMP will pay a special dividend of $11.3 million to the preclosing GMP shareholders and will resume paying quarterly dividends on its outstanding preferred shares following the special meeting, while $36 million in retention payments will be made to Richardson GMP’s investment advisors upon closing of the transaction. Additionally, Richardson Financial will not redeem its $32 million preferred share ownership in order to invest in the growth in the new business; instead, their preferred share terms will be amended to add a right to redeem the preferred shares for cash any time following the third anniversary of closing. The DBRS Morningstar-rated Cumulative Preferred Shares will remain with the consolidated entity.

GMP has called a special meeting of common shareholders on October 6, 2020, to approve the transaction, which would require a majority of the minority shareholders (excluding RFGL) to vote in favour of the proposal. GMP will subsequently require regulatory approval from the Investment Industry Regulatory Organization of Canada. The transaction is expected to close in the fourth quarter of 2020.

Following the approval of the transaction, RFGL is expected to have the largest ownership interest representing 40% of the consolidated entity. GMP shareholders and the Richardson GMP investment advisors and management would retain 31.4% and 28.5%, respectively.

KEY RATING CONSIDERATIONS
The continued Under Review period considers that even though the transaction’s parties have reached a definitive agreement the consolidation of GMP with Richardson GMP is still subject to shareholder and regulatory approval. DBRS Morningstar will assess GMP’s pro forma structure once it consolidates full ownership of Richardson GMP. This assessment will review the Company’s assets and liabilities composition, ownership, future strategic direction, and management’s ability to execute on this plan. If the consolidation were not to occur, DBRS Morningstar would need to assess GMP’s standalone intrinsic strength, including its credit fundamentals, prospects for growth, and ability to maintain debt service payments on its Cumulative Preferred Shares.

RATING DRIVERS
DBRS Morningstar would upgrade the rating on GMP if the Company’s franchise prospects and post-transaction pro forma financials are deemed to be stronger with the consolidation of Richardson GMP. Conversely, DBRS Morningstar would downgrade the rating if GMP’s credit fundamentals weaken. Additionally, negative rating pressure could emerge if the current transaction does not conclude as expected.

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 Banks and Banking Organizations (June 8, 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.

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.

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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