DBRS Limited (DBRS Morningstar) downgraded its rating on Canaccord Genuity Group Inc.’s (CF or the Company) Cumulative Preferred Shares to Pfd-4 (high) from Pfd-3 (low) and maintained the trend at Negative. The Company has a Support Assessment of SA3, which implies no expected systemic support.
KEY RATING CONSIDERATIONS
The rating downgrade recognizes the considerable headwinds facing all nonbank financial institutions, particularly those with more limited or weaker business models that lack the breadth and scale to overcome significant near-term challenges. CF is a Canadian-based financial institution with $4.5 billion in assets as of Q3 2020, operating in the U.S., the United Kingdom (UK), and Australia, with a focus on capital markets activities and wealth management. Given the abruptness and severity of the economic contraction caused by the Coronavirus Disease (COVID-19), combined with uncertainty about the magnitude or duration of the downturn, DBRS Morningstar has concerns about potential impact on the Company’s capital markets businesses. DBRS Morningstar sees near-term challenges for participants in the capital markets as significant, with potential issues including reduced investment banking volumes, asset value declines, unmet margin calls/collateral liquidation at lower prices, illiquid assets stalled on the balance sheet, and limited market access for funding, all of which could adversely affect the financials of firms such as CF in DBRS Morningstar’s opinion. Additionally, while CF’s trading businesses will likely benefit from the significant market volatility, the magnitude of these revenues will likely be insufficient to offset the other notable headwinds.
In maintaining the Negative trend, DBRS Morningstar notes the leverage utilized in recent wealth management and other acquisitions in Canada, the U.S., the UK, and Australia where CF expected the combined businesses’ success and efficiencies to drive profits and reduce leverage over time. With unsupportive revenue headwinds in wealth management, DBRS Morningstar remains concerned that the impact of the coronavirus-related downturn could impede CF’s ability to comfortably meet contractual payments.
Any upgrade is unlikely in the short to medium term, given the Negative trend on the rating; however, over the longer term, DBRS Morningstar could revise the trend back to Stable if CF strengthens its balance sheet fundamentals and demonstrates earnings resiliency. Conversely, material negative stresses on the Company’s liquidity or funding profiles would result in a rating downgrade. 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/Very Weak; Risk Profile – Moderate; Funding & Liquidity – Moderate/Weak; and Capitalization – Moderate/Weak.
DBRS Morningstar notes that this press release was amended on July 6, 2020, to incorporate the links to the methodologies.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Global Methodology for Rating Investment Management Companies (January 21, 2020; https://www.dbrsmorningstar.com/research/355764/global-methodology-for-rating-investment-management-companies) and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019; https://www.dbrsmorningstar.com/research/352346/dbrs-morningstar-criteria-preferred-share-and-hybrid-security-criteria-for-corporate-issuers).
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.
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-557