Morningstar DBRS Confirms RF Capital Group Inc.'s Cumulative Preferred Shares Credit Ratings 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, meaning that timely systemic support is not expected.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation and Stable trend reflect RF Capital's solid wealth management franchise, good financial flexibility, and stable assets under administration (AUA). A significant portion of revenues are fee-based, supporting the consistency of underlying earnings. However, the Company has seen an increased amount of AUA loss due to advisor attrition recently, largely offsetting with the AUA gain from new advisor recruitments. Morningstar DBRS sees operational risk among key risks for the Company to manage and expects that various technology platform updates should ultimately provide a longer-term benefit to RF Capital's operational capabilities and its AUA base. The credit rating also considers several recent executive leadership changes and the refined strategic focus on prioritizing operational excellence and organic growth.

CREDIT RATING DRIVERS
RF Capital Group Inc.'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 and robust overall profitability, while maintaining solid balance sheet fundamentals.

Conversely, the Company's credit rating would be downgraded if the Company shows substantially constrained earnings power and significant operational or reputational lapses. In addition, leadership transitions leading to material delays in strategic executions and persistent key advisor departures would also result in a downgrade.

CREDIT RATING RATIONALE
Franchise Strength Building Block Assessment: Good/Moderate
RF Capital is among the key players in the independent wealth advisory space, with the overall Canadian wealth management market dominated by wealth management divisions from major Canadian banks. The Company has reached its $40 billion AUA record for the first time in November 2024 ($39.2 billion as at Q1 2025), benefitting from strong market growth and advisor recruiting activities. However, in 2024 the Company also experienced departures of advisor teams that managed $2.3 billion of AUA, partially due to the persistent operational challenges related to back-office functions. Since 2024, The Company has undergone several executive leadership changes, including Dave Kelly as the new president and CEO in October and Francis Baillargeon as the new CFO in November 2024, who are both well-experienced leaders in the industry. Under the new executive leadership, RF Capital refined its focus on providing strong operational and technology supports to advisors and recruiting like-minded advisor teams.

Earnings Power Building Block Assessment: Moderate
RF Capital has been generating stable revenues over the past few years, benefitting from a higher proportion of fee-based AUAs. The Company reported a positive net income of $0.6 million in 2024, following three years of net losses. However, Morningstar DBRS expects the operating expenses to remain relatively high in the near future due to continuous investments in strategic initiatives and recruiting efforts. RF Capital reported a slight growth of 4% in EBITDA to $57 million in 2024. Three-year weighted EBITDA margin, as per Morningstar DBRS calculations, is at 15.5%, while the EBITDA margin in Q1 2025 declined to 9.5% primarily due to higher mark-to-market expenses related to deferred share-based employee compensation.

Risk Profile Building Block Assessment: Good
RF Capital has minimal 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. RF Capital has implemented new initiatives prioritizing operational excellence, but the cost of initiatives and execution outcomes remains key considerations. There are minimal investments on the balance sheet, and assets managed by the financial advisors are largely liquid. The Company is also exposed to credit risk primarily through the margin loans to clients, which are secured by assets in the client's account and well managed by RF Capital under restrictive lending limits.

Funding and Liquidity Building Block Assessment: Good/Moderate
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, 2025, RF Capital had drawn $80.5 million against the facility, unchanged since the establishment of the facility in 2021. It also had $87 million of cash on hand as working capital as at Q1 2025.

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. The Company is 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 and Company's internal requirements as of Q1 2025.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or 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 Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196.

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

The principal methodology is the Global Methodology for Rating Investment Management Companies (December 4, 2024) https://dbrs.morningstar.com/research/444102. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The following methodology has also been applied:

Morningstar DBRS Global Corporate Criteria (February 3, 2025)
https://dbrs.morningstar.com/research/447186

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 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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends 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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