Morningstar DBRS Downgrades CI Financial Corp. Credit Ratings, Including CI Investments Inc.’s Issuer Rating, to BBB (low) With a Negative Trend

DBRS Limited (Morningstar DBRS) downgraded the credit 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 (low) from BBB. The trends on the credit ratings remain Negative.

KEY CREDIT RATING CONSIDERATIONS
The credit rating downgrades reflect the persistently high debt-to-EBITDA ratio and deteriorating fixed-charge coverage ratio, as the Company continues to prioritize buying back shares over deleveraging, a strategy that is expected to continue. The Negative trends also reflect deteriorating credit fundamentals, including weakened earnings with the revenue from the asset management business continuing to decline relative to prior years. Moreover, wealth management earnings growth has not been able to offset the very high level of expenses, including those related to deferred acquisition costs. Moreover, the planned structural debt reduction financed by U.S. dollars-denominated debt is considered in the context of future acquisition-related expenses, higher technology investments, and integration-related costs together with the shortened debt maturity profile.

CII's Issuer Rating reflects its role in CI as the holding company's major operating subsidiary housing the mutual fund manufacturing operation. The credit 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.

CREDIT RATING DRIVERS
Morningstar DBRS would revert the trend to Stable if the Company materially lowers leverage as measured by debt-to-EBITDA or reports a sustained improvement in earnings.

The credit ratings would be downgraded if the Company has substantially decreased earnings power resulting in difficulty in generating cash flows and a sustained deterioration in fixed-charge coverage.

CREDIT RATING RATIONALE
Franchise Building Block (BB) Assessment: Good
CI has maintained a strong market share in the Canadian asset management industry as a leading nonbank-affiliated fund company. In addition CI has substantially increased its wealth management assets under advisement, particularly in the U.S. through multiple acquisitions of registered investment advisor firms. This strategy has enabled the Company to diversify its earnings by client type and geography, which Morningstar DBRS views positively. Overall, CI reported $474.2 billion of total assets at Q1 2024, an all-time high.

Earnings Building Block (BB) Assessment: Good/Moderate
Annual net redemptions in 2023 have slowed down compared with the 2018-20 period, but they persist. However, Q1 2024 saw large net outflows of $1.6 billion. In the meantime earnings from the U.S. wealth management business (rebranded as Corient in August 2023) have not increased enough to offset the much higher expenses associated with past acquisitions. The Company's EBITDA and net income was negative in Q1 2024.

Risk Building Block (BB) Assessment: Good/Moderate
Operational risk remains heightened because of the rapid pace of past acquisitions and significant operational and integration changes. The capital-light nature of the business, good cash flow generation, and the liquid nature of assets reduces some of the financial risks. However, the terms of the convertible preferred shares issuance to the U.S. business minority investors exposes CI to substantial market risk.

Funding and Liquidity Building Block (BB) Assessment: Weak
CI's lower credit rating, combined with significant debt decreases its financial flexibility and their ability to withstand a stressed environment. CI also has access to a $800 million credit facility from Canadian banks, which is drawn at approximately half capacity, and which the Company continues to use for various acquisition-related expenses that are coming due in 2024. On a positive note, the Company was able to raise five-year debt in the U.S., in May 2024.

Capitalization Building Block (BB) Assessment: Weak/Very Weak
The Company's gross debt-to-EBITDA ratio has shown an increasing trend over the past several years and currently significantly exceeds 3 times. The fixed charge coverage has materially deteriorated to a level that Morningstar DBRS considers moderate/weak. CI continues to actively repurchase shares as management believes the stock is undervalued.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

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

The principal methodology is the Global Methodology for Rating Investment Management Companies (April 15, 2024), https://dbrs.morningstar.com/research/431182. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030, in its consideration of ESG factors.

The following methodology has also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024),
https://dbrs.morningstar.com/research/431186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

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 https://dbrs.morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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