DBRS Morningstar Confirms Power Corporation of Canada at “A” and Pfd-2, Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Power Corporation of Canada’s (POW or the Company) Issuer Rating and Senior Debt rating at “A.” DBRS Morningstar also confirmed POW’s Non-Cumulative First Preferred Shares and Cumulative Redeemable First Preferred Shares, 1986 Series ratings at Pfd-2. All trends are Stable.

KEY RATING CONSIDERATIONS
The rating confirmations reflect POW’s excellent franchise in life insurance and asset management across several key markets in Canada, Europe and the United States. The Company benefits from a conservative risk profile with healthy levels of liquidity and steady dividend flows from its subsidiaries. POW’s Stable trends correspond to the Stable trends of its main subsidiary, Power Financial Corporation (PWF; rated A (high) with a Stable trend by DBRS Morningstar).

RATING DRIVERS
POW’s ratings reflect those of its main subsidiary, PWF, which in turn mostly reflects the ratings of Great-West Lifeco Inc. (GWO; rated A (high) with a Stable trend by DBRS Morningstar). An upgrade in PWF or GWO’s ratings could potentially benefit POW’s ratings. Conversely, negative rating pressure could result from a downgrade of PWF’s or GWO’s ratings. A sizable shift in the Company’s risk profile resulting from a major divestiture or acquisition, or a material increase in unconsolidated financial leverage, as well as evidence of deterioration in governance controls across the Company could also put negative pressure on the ratings.

RATING RATIONALE
DBRS Morningstar’s rating assessment of POW is largely derived from the Company’s 64.1% equity interest in PWF, which, in turn, has controlling interests GWO and IGM Financial Inc. (IGM; rated A (high) with a Stable trend by DBRS Morningstar), two of Canada’s largest financial institutions in the insurance and asset management industries, respectively. Because GWO is the greatest contributor to the earnings and overall strength of PWF and, consequently, of POW, DBRS Morningstar’s “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations” is the primary methodology for rating POW. The ratings for POW are one notch below PWF’s ratings under the holding company criteria because of structural subordination. Additionally, PWF’s Issuer Rating has been set at the same level as GWO’s Issuer Rating of A (high).

POW is a corporate holding company that has been controlled by the Desmarais family since 1968, with PWF as its major asset. Through PWF, POW is indirectly invested in GWO, the largest life insurance operation in Canada; IGM, Canada’s largest non-bank-owned mutual fund company; and Pargesa Holding S.A., a Swiss holding company with indirect interests in various largely global companies through Groupe Bruxelles Lambert S.A. Aside from PWF, POW’s other interests include Sagard Investment Funds (equity investment funds focused in Europe, North America and China); Power Energy (sustainable and renewable energy); a minority ownership in China Asset Management Co., Ltd. (China AMC), a Chinese asset management company (POW and IGM own a combined 27.8% interest in China AMC); and other investments. The Company’s strategy of having significant interests in many of its investments allows it to contribute meaningfully to their management and influence strategic decisions.

DBRS Morningstar views POW as benefiting from a strong capital position, high liquidity and prudent decision making. On a stand-alone basis, the Company’s financial profile is conservative. Financial leverage, as measured by debt plus preferred shares-to-capital, is low at 11.1% (as at September 30, 2019). The Company’s interest payments on its senior debt and dividend obligations on its perpetual preferred shares remain well covered (15.9 times as at the nine months ended September 30, 2019 (9M 2019)). The Company’s liquidity is strong, with $690 million in cash and short-term investments as at September 30, 2019. At 9.2%, 9M 2019 return on equity for common shareholders is somewhat below the average return for the last five years, as the Company faces some pressure on earnings resulting from slower organic growth because of the mature nature of the markets in which it operates and the prevailing low interest rates environment.

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

The principal methodologies are DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relations (November 2019), Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (September 2019), Rating Companies in the Asset Management Industry (December 2018) and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2019), which can be found on our website under Methodologies & Criteria.

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.dbrs.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.

For more information on this credit or on this industry, visit www.dbrs.com.

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