Morningstar DBRS Confirms RF Capital Group Inc.'s Cumulative Preferred Shares Credit Rating at Pfd-4 (high), Stable Trend

DBRS Limited (Morningstar DBRS) confirmed RF Capital Group Inc.'s (RF Capital or the Company) Cumulative Preferred Shares credit rating at Pfd-4 (high) with a Stable trend. The Company's Support Assessment is SA3.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation reflects RF Capital's solid wealth management franchise, which is underpinned by its good reputation and stability in assets under administration (AUA) and its continued progress in executing its strategic vision. A significant portion of revenues are fee-based, supporting the consistency of underlying earnings. Morningstar DBRS sees operational risk as a key 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 credit 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 and other acquisitions, RF Capital may require an increase in leverage.

CREDIT RATING DRIVERS
RF Capital's credit rating would be upgraded if there is a significant strengthening of the Company's market positioning and scale combined with a return to consistent overall profitability, while maintaining solid balance sheet fundamentals.

Conversely, the Company's credit rating would be downgraded if the Company shows an inability to improve financial performance and significant operational or reputational lapses. In addition, an acquisition that leads to a sustained material increase in leverage would result in a downgrade.

CREDIT RATING RATIONALE
Franchise Building Block Assessment: Good/Moderate
RF Capital's credit rating benefits from its long-standing presence and good reputation in Canada, where it operates in the independent wealth advisory space. At $37 billion in AUA as at March 31, 2024, the Company is one of the larger independent players in an industry dominated by the wealth management divisions of the large Canadian banks and is further aiming to grow in this space both organically and through acquisitions. To that end, the Company has made significant investments in advisor recruitment and support and succession-planning initiatives. RF Capital has also made considerable investments in recent years in its back office and technology platforms, including moving its advisory platform to Fidelity Clearing Canada's uniFide platform and partnering with Envestnet to support its advisors via digital tools, among other items. While positive for the Company's long-term growth prospects, the investments have resulted in elevated costs in the interim, which in turn has reduced EBITDA growth.

Earnings Power Building Block Assessment: Moderate
RF Capital's expenses are currently elevated relative to its scale. Significant investments ahead of the AUA and revenue growth that the company expects to follow have resulted in negative net income for the past two years. Morningstar DBRS expects the level of expenses to decline as the Company completes several of its platform enhancement projects; however, overall operating expenses are likely to remain moderately elevated as the Company continues to invest in growth. Positively, the Company benefits from solid revenue, a high proportion of which is fee-based. The EBITDA margin (adjusted for transformation and other one-time costs) is in line with other Canadian peers.

Risk Profile Building Block Assessment: Good
RF Capital has little on balance sheet risk but faces potential operational risk as it implements various initiatives to grow its business. Operational risk management is critical in a data-intensive and transactional environment, where the consequences of operational breakdown can be severe, both financially and in terms of reputational risks. There are minimal investments on the balance sheet, and assets managed by the financial advisors are largely liquid.

Funding and Liquidity Building Block Assessment: Good/Moderate
The Company has little on balance sheet risk but faces operational risk as it implements various initiatives to grow its business. RF Capital derives liquidity from its working capital and its credit facilities. The Company has a $200 million revolving credit facility with a syndicate of lenders. As of March 31, 2024, RF Capital had drawn $80.5 million against the facility, unchanged from the balance as at YE2023. It also
had $65 million of cash and $88 million of net working capital on hand as at Q1 2024.

Capitalization Building Block Assessment: Moderate
RF Capital's leverage is moderate. There is limited growth in retained capital because of investments in strategic initiatives and recruiting. Some of the Company's subsidiaries are subject to regulatory capital requirements that ensure sufficient liquidity to meet obligations. According to management, regulatory capital levels, which fluctuate based on margin requirements for outstanding trades and other factors, were in compliance with all regulatory requirements during Q1 2024.

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.

Morningstar DBRS notes that this Press Release was amended on December 23, 2024 to revise the "Risk Building Block Assessment" from "Moderate" to "Good."

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, 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 dbrs.morningstar.com.

The credit rating was initiated at the request of the rated entity.

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

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

This is a solicited credit rating.

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 dbrs.morningstar.com.

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