DBRS Morningstar Confirms RF Capital Group Inc.’s Cumulative Preferred Shares at Pfd-4 (high); Changes Trend to Positive

DBRS Limited (DBRS Morningstar) confirmed the Cumulative Preferred Shares rating of RF Capital Group Inc. (RF Capital or the Company) at Pfd-4 (high) and changed the trend to Positive from Stable. The Company’s Support Assessment is SA3.

KEY RATING CONSIDERATIONS
The rating confirmation and Positive trend recognize the continued growth momentum of RF Capital’s franchise. The Company enjoys a solid wealth management franchise, which is underpinned by its good reputation that supports a long track record of consistent growth in assets under administration (AUA) and healthy operating earnings. A significant portion of revenues are fee based, supporting earnings consistency. The rating incorporates an expectation of continuing franchise momentum while maintaining solid balance sheet fundamentals. DBRS Morningstar sees operational risk as a critical risk for the Company to manage, and expects that investments and upgrades to various technology platforms to help service clients should provide a longer-term benefit to RF Capital’s operational capabilities as well as its expense base. The rating also considers that RF Capital could face challenges in executing its ambitious strategy for future growth. Furthermore, in order to grow the business through advisor acquisition, RF Capital may require an increase in leverage.

RATING DRIVERS
Continued franchise momentum, coupled with consistent earnings and expense improvement with solid balance sheet fundamentals, would lead to a rating upgrade. Conversely, DBRS Morningstar would downgrade the rating if RF Capital’s credit fundamentals weaken or if there are any significant operational or reputational issues.

RATING RATIONALE
RF Capital is one of Canada’s leading independent wealth managers with AUA of $36 billion. The Company operates 20 offices across the country with 163 advisor teams serving 31,000 high-net-worth clients. The wealth management industry in Canada is dominated by the large banks with smaller independent firms competing to gain market share. RF Capital has been successful in acquiring market share over the years supported by the favourable reputation of its majority owner, the Richardson family, which has a long proven track record in the business. RF Capital is in the midst of deploying an ambitious multi-year strategy aimed at growing the Company’s adjusted EBITDA to between $200 million and $300 million and tripling the Company’s AUA to $100 billion by 2025. This will be achieved organically through the addition of advisor teams and the investment in technology to improve platforms and product offerings, and inorganically through opportunistic acquisitions and strategic partnerships.

The Company reported consolidated results for the first time in Q1 2021, and thus this is the first year in which DBRS Morningstar is able to compare results with prior periods. RF Capital’s revenue was up 6% year over year (YOY) reaching $88.8 million in Q1 2022. The increase was driven largely by record fee revenue of $67.9 million, which was up 18% from Q1 2021. Importantly, the Company benefits from solid revenue that has a steady proportion of fee income that is supportive of the rating as recurring fee-based revenue was 89% of commissionable revenue in Q1 2022. The adjusted EBITDA margin (which excludes transformation and other one-time costs) stood at 14.7% in Q1 2022 versus 17.4% for Q1 2021 as revenue growth was offset by advisor compensation paid on that revenue and higher operating expenses. Going forward, the Company expects to realize run-rate operating expense savings from its strategic carrying broker agreement with Fidelity Clearing Canada, which is scheduled to begin providing custody, clearing, and trade settlement services to Richardson Wealth in Q4 2022.

Following the sale of its capital markets business, RF Capital’s on balance sheet risk mainly lies with its carrying broker services, which include trade execution, clearing, settlement, custody, and other middle- and back-office services. These carrying broker services are used internally, as well as by Stifel Nicolaus Canada Inc., which is the Canadian capital markets business of Stifel. This market risk is well managed and has minimal impact on the Company’s financial position. However, RF Capital faces operational risk as it implements various initiatives, including the introduction of new technology platforms, to grow its business.

The Company is sufficiently funded and in Q3 2021 secured a $200 million revolving credit facility to facilitate investments in platforms, recruiting, and finance advisor team acquisition. The Company reported a fixed charge coverage ratio (using adjusted EBITDA) of 3.4 times (x) in Q1 2022. Furthermore, RF Capital holds appropriate working capital levels to manage its day-to-day liquidity needs. The Company employs modest leverage with a debt (including 25% of preferred shares per DBRS Morningstar criteria) to adjusted EBITDA of 3.1x in Q1 2022.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/Governance (ESG) 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.

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

The principal methodologies are the Global Methodology for Rating Investment Management Companies (January 12, 2022; https://www.dbrsmorningstar.com/research/390678) and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355). 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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