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

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). All ratings have a Negative trend.

KEY RATING CONSIDERATIONS
The Negative trend reflects a pattern of increasing debt levels at the Company, with the most recent debt issuance being the June 2021 senior debt issuance of USD 900 million (deal is yet to be closed). This follows issuances of USD 260 million in January 2021, USD 700 million in December 2020, and $450 million in May 2020. While some of the proceeds have been used to refinance or pay off existing debt, overall gross debt levels have increased materially in the past year, up to $3.3 billion currently on a pro forma basis from $1.7 billion at the end of Q1 2020. As a result, debt metrics have deteriorated, with the gross debt-to-EBITDA ratio (as calculated by DBRS Morningstar on a pro forma basis) increasing to above 3.0 times (x). DBRS Morningstar has limited tolerance for any further increase in leverage, and will look for declining debt-to-EBITDA levels in order to maintain the rating at the current level.

The Company continues to return a considerable portion of its free cash flow to shareholders in the form of dividends and share buybacks, although share repurchases no longer appear to be funded by free cash flow which DBRS Morningstar views positively. Given that fee-based assets comprise the majority of CI’s revenues, and the fact that redemptions continue to outpace gross flows, the Company’s elevated leverage increases its vulnerability to adverse market movements that may potentially result in a material reduction in cash flow. Offsetting some of the risk in the near term is the Company’s redemption or repurchases of debt maturities that are due in the next two years.

The ratings have had Negative trends since June 2020. At the time, the Negative outlook took into consideration the prevailing uncertainty resulting from the Coronavirus Disease (COVID-19) pandemic and any potential negative market impacts that could reduce CI’s assets under management (AUM) and, consequently, its EBITDA and cash flow generation. CI’s persistently high rate of redemptions relative to gross sales in particular increased the Company’s vulnerability to a declining market environment. Since then, markets overall have recovered from a steep initial decline and instead have shown considerable strength, reducing the risk of AUM declines that could place pressure on the Company’s cash flow. While net flows have also improved, they remain negative overall which continues to be a rating headwind.

RATING DRIVERS
Given the Negative trend, an upgrade is unlikely in the near term. DBRS Morningstar would change the trends to Stable from Negative given evidence of improving EBITDA that contributed to declining leverage, combined with a reduction in the Company’s operational risk profile. Over the longer term, a material reduction in the Company’s leverage to be closer to a debt-to-EBITDA level of 2.0x or below, while maintaining good cash flow generation and reducing the levels of redemptions relative to gross sales would lead to an upgrade. Conversely, ratings would be downgraded if CI’s debt leverage remains elevated for a sustained period of time and is accompanied by other signs of weaknesses, including declining AUM, continued net outflows, or difficulties in realizing value from recent acquisitions.

RATING RATIONALE
The ratings confirmation reflect CI’s strong market share in the Canadian asset management industry as a leading non-bank-affiliated fund company and its increasing global presence. 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. The Company’s franchise has shown further improvement in the past year, as evidenced by an increase in both AUM and revenues, and an improvement in net flows, particularly in the newer fund strategies.

The Company’s financial flexibility is currently under pressure as a result of increased debt levels, a trend that is continuing with the recent issuance of USD 900 million of 30-year senior debt. Similarly, the Company’s gross debt-to-EBITDA ratio has shown an increasing trend in the past few years, reaching 2.7x at Q1 2021 and up to 3.8x on a pro forma basis. Comparatively, CI had $1.75 billion of debt at Q1 2020 with a debt-to-EBITDA ratio of 2.2x and $1.60 billion of debt at YE2019, with a debt to EBITDA ratio of 1.8x. With debt levels being significantly higher than they were last year, DBRS Morningstar assumes that CI will benefit from its increased scale and synergies to grow EBITDA and gradually reduce leverage. Offsetting some of the risk arising from an increase in debt is the replacement of shorter duration debt with issuances with longer maturities and lower interest rates, improving financial flexibility in the near to medium term, as well as the fact that debt is no longer used to fund share repurchases.

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, particularly given that fee-based assets comprise the majority of CI’s revenues. The Company’s current cash flow is strong and sufficient to pay financing and operational expenses but may come under increasing pressure because of a persistently high level of redemptions relative to gross sales, increasing fee pressure, as well as from any further market declines.

DBRS Morningstar views operational risk is currently highly elevated, mainly due to the rapid pace of acquisitions of registered investment advisors (RIAs) in the U.S. While the Company has taken measures to reduce integration risks and to ensure that newly acquired assets remain retained at CI, the high number of acquisitions over a short period of time creates elevated risks. Additionally, the Company has implemented material changes in the way that it operates, including in the way it structures and incentivizes its distribution force. While DBRS Morningstar views positively the Company’s well-articulated strategy and the efforts to grow and revitalize the business, the significant amount of changes in a short period of time increases the risk profile of the Company in the short term.

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. CI has taken steps to diversify and increase its earnings by investing in the wealth management space, including in the U.S. RIA market, as well as enhancing its product suite through the development of new and innovative products. Through the use of digital technology, CI is aiming to strengthen its distribution and marketing capabilities and increase its operational efficiencies.

While net outflows remain a key issue putting pressure on the Company’s ratings, good gross flows, market appreciation, and acquisition activity has resulted in AUM improving to a sizable $138 billion in Q1 2021 and wealth management assets increasing significantly to reach $102 billion from $46 billion in Q1 2020. The Company’s earnings are expected to continue to benefit from the increase in wealth management assets, allowing EBITDA to improve and diversifying the Company’s sources of revenue by geography and product type. Additionally, CI’s financial profile benefits from the low level of risky assets on its balance sheet, minimal use of capital invested in funds and good liquidity management, including access to a $700 million credit facility.

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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is the Global Methodology for Rating Investment Management Companies (December 7, 2020, https://www.dbrsmorningstar.com/research/370957).Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

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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