DBRS Morningstar Comments on the Pre-IPO Minority Investment in CI Financial Corp.’s U.S. Wealth Management Business

DBRS Limited (DBRS Morningstar) notes that on May 11, 2023, CI Financial Corp. (CI or the Company; rated BBB with a Stable trend by DBRS Morningstar) announced that a group of global institutional investors (collectively, the Investors), agreed to make a pre-initial public offering (IPO) investment of $1.34 billion that will amount to a 20% interest in CI’s U.S. wealth management business (CI US), contingent on the valuation of the CI US business at the time of the IPO. CI previously committed to an IPO, but challenging market conditions have resulted in CI’s opting for a private investment instead.

Positively, the Company noted it would use the proceeds to pay down debt that had previously been growing rapidly, causing credit fundamentals to deteriorate. Indeed, CI’s debt-to-EBITDA ratio of 7.34 times for Q1 2023 (as calculated by DBRS Morningstar) is extraordinarily high. While the high valuation of the CI US business appears to validate CI’s expansion strategy in the U.S., the deal terms appear favourable for the Investors, meaning that they will realize a good return on investment, regardless of whether the CI US IPO is successful or not.

The investment is in the form of convertible preferred equity, which entitles holders to dividends only if declared by the board of directors of CI US. The Company has stated that CI US do not have plans to declare dividends.

Investors’ preferred equity is convertible into one share of CI US common equity, at the earliest of (1) the option of the holders or (2) the closing of an IPO of CI US, provided it results in proceeds of at least USD 500 million. The preferred equity conversion rate depends on the timing of the IPO and the IPO’s proceeds resulting in a 20%, or greater, Investors’ stake in CI US. If an IPO of CI US does not materialize within the next six years, the Investors may ask for an exit from their investment.

DBRS Morningstar will fully assess the impact of this transaction on the ratings along with our forward-looking view of CI’s overall business credit fundamentals by the end of May 2023.

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