DBRS Limited (DBRS Morningstar) confirmed its rating on Canaccord Genuity Group Inc.’s (CF or the Company) Cumulative Preferred Shares at Pfd-3 (low) and changed the trend to Negative from Stable. The Company has a Support Assessment of SA3, which implies no expected systemic support.
DBRS Morningstar assessed the Cumulative Preferred Shares rating using the “Global Methodology for Rating Investment Management Companies” (January 2020) where it previously been assessed under the “Global Methodology for Rating Banks and Banking Organisations” (June 2019). DBRS Morningstar will continue to use the “DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers” (November 2019).
KEY RATING CONSIDERATIONS
The trend change to Negative from Stable accounts for the impact that current stresses to the global economy and significant market volatility are having and will likely continue to have on CF’s business. Global reactions to the Coronavirus Disease (COVID-19) pandemic have caused economic stresses in the capital markets with declining market values across many asset classes. These factors were abrupt and unexpected, giving the Company minimal time to reposition its balance sheet, which will likely translate into headwinds for its earnings.
Specifically, DBRS Morningstar has the following concerns:
(1) While CF’s trading businesses may benefit from increased volatility, its investment banking activities have been largely subdued among significant global uncertainty related to the coronavirus and its ultimate impact. DBRS Morningstar expects this uncertainty to persist, which will likely adversely affect earnings in the coming quarters.
(2) DBRS Morningstar anticipates that the Company’s margin-lending business may be required to liquidate collateral at fire sale prices, as with other global financial institutions, resulting in potential losses for CF.
(3) DBRS Morningstar expects the current environment might create difficulties for CF as it manages the different businesses it has acquired in the U.S., UK, and Australia over the last few years while also paying down associated debt that will come due throughout the year.
With the combination of the above factors, DBRS Morningstar deems a Negative trend as currently appropriate, given considerable headwinds to earnings that increase CF’s risk of being unable to service its DBRS Morningstar-rated debt. With no direct access to relief measures announced by Canada’s federal agencies, CF may face challenges maintaining funding and liquidity in a stressed scenario. Furthermore, the current rapidly evolving environment could test CF’s operational capacity as managing risk and systems across a broad range of business and geographies, some of which have only recently been integrated into the Company, could be challenging for management amid the present crises.
Any upside pressure is unlikely in the short term; however, DBRS Morningstar may change the trend back to Stable if the global economic environment recovers quickly with little impact on CF’s franchise and earnings.
Additional negative pressure on the rating could be swift as the coronavirus-related impact is evolving daily. DBRS Morningstar sees continued earnings headwinds and market volatility, which could affect working capital as likely drivers of a downgrade. Stresses to liquidity would also add negative rating pressure. Furthermore, given CF’s high reliance on market confidence to support its franchise, any significant operational or reputational issues would likely negatively affect the rating.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
The Grid Summary Grades for the Company are as follows: Franchise Strength – Good; Earnings Power – Weak; Risk Profile – Good/Moderate; Funding & Liquidity – Moderate; and Capitalization – Moderate/Weak.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Global Methodology for Rating Investment Management Companies (January 2020) and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2019).
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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.dbrsmorningstar.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.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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