DBRS Morningstar Downgrades CI Financial Corp. and CI Investments Inc. to BBB, Changes Trends to Stable

DBRS Limited (DBRS Morningstar) downgraded the ratings of CI Financial Corp.’s (CI or the Company) Senior Unsecured Debentures and the Issuer Rating of CI’s principal subsidiary, CI Investments Inc. (CII), to BBB from BBB (high). DBRS Morningstar also changed the trends on the ratings to Stable from Negative.

KEY RATING CONSIDERATIONS
The rating downgrades and Stable trends reflect the persistently high debt levels at the Company, with overall gross debt levels totalling $3.3 billion as at Q1 2022, or about $2 billion higher compared with two years ago, when the ratings were put on a Negative trend in June 2020. As a result, debt metrics such as the gross debt-to-EBITDA ratio (as calculated by DBRS Morningstar) deteriorated substantially by the end of 2021 to 4.9 times (x), only to improve somewhat in Q1 2022 to 3.5x as the Company paid off a small portion of debt with cash and by liquidating some of its investments.

As previously communicated in DBRS Morningstar’s press release on June 2, 2021, the Company had to decrease its leverage, evidenced by declining debt-to-EBITDA levels, in order to maintain the BBB (high) rating, which did not happen. Adding to the headwinds are lower market valuations and higher volatility leading to increased redemptions in Q1 2022 and a decline of 6% in assets under management (AUM) to $136.3 billion compared with Q4 2021. This will pressure cash flows because AUM are CI’s key source of fee-based income. On the other hand, the rapid pace of acquisitions, which accelerated in 2021 (especially in the U.S. registered investment advisor (RIA) market), has contributed to very strong growth in assets under advisement (AUA), which have doubled to $146 billion in Q1 2022 compared with year-ago levels. Higher AUA is expected to increase cash flow in the short to medium term, which DBRS Morningstar views positively. The Company also plans to reduce its debt levels by using the net proceeds of the sale of up to 20% stake in the U.S. wealth management business. However, the size of the initial public offering is subject to market conditions and is not expected to be completed by the end of this year. While the Company continues to return a considerable portion of its free cash flow to shareholders in the form of dividends and share buybacks, the aggregate amount relative to free cash flow has moderated, which DBRS Morningstar also views positively.

RATING DRIVERS
DBRS Morningstar would upgrade its ratings on CI if it showed material and sustained improvement in its EBITDA margin and leverage, as measured by the debt-to-EBITDA ratio, while maintaining good cash flow generation.

DBRS Morningstar would downgrade the ratings if CI’s leverage increases from current levels for a sustained period of time or the Company has difficulty in generating cash flow as a result of financial weaknesses, including persistent and large declines in AUM or a deteriorating risk profile.

RATING RATIONALE
CI has strong market share in the Canadian asset management industry as a leading non-bank-affiliated fund company, and it is increasing its 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 showed further improvement in 2021, particularly through improvement in net flows.

The Company’s ability to withstand a stressed environment is currently under pressure as a result of increased debt levels. The Company’s gross debt-to-EBITDA ratio has shown an increasing trend in the past few years, reaching 4.9x at Q4 2021 and currently at 3.5x. Comparatively, CI had $1.75 billion of debt at Q1 2020 with a debt-to-EBITDA ratio of 2.2x. 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, as well as the fact that debt is no longer used to fund share repurchases. DBRS Morningstar expects that CI will benefit from its increased scale and synergies to grow EBITDA and gradually reduce leverage.

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 may come under increasing pressure from any further market declines and more redemptions.

DBRS Morningstar views operational risk as elevated, mainly because of the rapid pace of acquisitions of 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 Company’s risk profile 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 very successful use of digital technology, CI is aiming to strengthen its distribution and marketing capabilities and increase its operational efficiencies.

The Company’s earnings are expected 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. 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodology is the Global Methodology for Rating Investment Management Companies (January 12, 2022; https://www.dbrsmorningstar.com/research/390678). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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