DBRS Limited (DBRS Morningstar) changed the trend to Negative from Stable and confirmed the ratings of CI Financial Corp. (CI or the Company) and its principal subsidiary, CI Investments Inc. (CII), including CI’s Senior Unsecured Debentures rating and CII’s Issuer Rating, at BBB.
KEY RATING CONSIDERATIONS
The change in the trend to Negative reflects the deterioration in CI’s credit fundamentals, including weaker earnings, still very high leverage, even with paying down some debt recently, and a lower fixed charge coverage ratio. DBRS Morningstar had previously anticipated that CI would have completed the initial public offering (IPO) of its U.S. wealth management business (CI US) to deleverage, but this was postponed due to market conditions with CI instead agreeing to a pre-IPO investment with a group of global institutional investors (Investors).
While the proceeds of the recently closed $1.34 billion pre- IPO investment will help lower debt levels by approximately $1 billion in Q2 2023, and decrease the extraordinarily high debt-to-EBITDA ratio of 7.3 times (x) (as of Q1 2023, per DBRS Morningstar calculations), CI’s leverage will continue to be elevated and its fixed charge ratio low because the Company redeemed mostly its lower-cost debt. In order to retain a majority interest in CI US, the Company will have to grow at a pace that is comparable to the past two years, which would be much more challenging under the current market conditions, and may lead to additional borrowing. Furthermore, the terms of the investment deal stipulate a 14.5% compounding annual return for the Investors that will be materialized at the time of the IPO, within the next six years. The uncertainty with respect to CI’s ultimate ownership in CI US may therefore remain high for some time. As such, DBRS Morningstar does not expect a significant and sustained reduction in debt over the medium term as would have been expected with an IPO.
The ratings are supported by CI’s strong market share in the Canadian asset management industry, as well as growing wealth management fees following the numerous acquisitions CI has completed in the U.S. RIA market, both of which contribute sizable and relatively stable cash flows. While the Company continues to return a considerable portion of its free cash flow to shareholders in the form of dividends and share buybacks, the aggregate amount relative to free cash flow has moderated. However, going forward, DBRS Morningstar expects the Company to resume its share buybacks. CI’s free cash flows remain resilient, which DBRS Morningstar views positively.
DBRS Morningstar would revert the trend back to Stable if the Company showed material and sustained improvement in leverage, measured by debt-to-EBITDA ratio, and improved earnings.
Conversely, ratings would be downgraded if there were no improvement in the debt-to-EBITDA and fixed charge coverage ratios.
CI has strong market share in the Canadian asset management industry as a leading non-bank-affiliated fund company. CI’s significant scale and a deep set of products allows it to effectively compete in the mature asset management market in Canada. Over the past three years, CI has substantially increased its presence in the U.S. RIA space primarily through acquisitions, becoming one of the major national players. Most of the acquisitions happened in 2021 at the height of the market valuations.
Annual net redemptions in 2022 have slowed down compared with the 2018–20 period, but they persist. Assets under management in Q1 2023 increased by $4.3 billion to $122 billion compared with Q4 2022, as a result of market gains and positive net sales, but are still down 10.5% on a year-over-year basis.
CI has solid revenues coming from increasingly diversified sources benefitting from wealth management revenue growth following numerous acquisitions in the U.S. RIA market. Evidencing this growth, wealth management (administration) fees made up over 40% of revenue in 2022, compared with 10% prior to executing on CI’s acquisition strategy. Nonetheless, expenses have grown at an even faster rate. As a result, CI’s EBITDA margin and the return on equity have been steadily declining over the last few years.
CI’s ultimate ownership of CI US is uncertain following the pre-IPO sale to the Investors. This uncertainty will be resolved following the IPO—the best-case outcome being that CI retains its current 80% share and the worst outcome being that it loses the entirety of its interest. In the meantime, operational risk remains somewhat elevated as the Company continues its integration of recent acquisitions while also centralizing many of the internal and external-facing functions.
The Company’s financial flexibility is limited, despite the paydown of outstanding debt. The Company’s gross debt-to-EBITDA ratio has shown an increasing trend in the past few years and will remain elevated even following the planned $1 billion debt reduction to $3.2 billion in May 2023. The fixed charge coverage has materially deteriorated to the current 2.2x from 4.1x at F2022 but is expected to improve slightly in Q2 2023 given the deleveraging.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).
The Grid Summary Grades for CI Financial Corp. are as follows: Franchise Strength –Strong/Good; Earnings Power – Good; Risk Profile –Good/Moderate; Funding/Liquidity – Moderate; Capitalization – Weak.
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Investment Management Companies (December 7, 2022; https://www.dbrsmorningstar.com/research/407010). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929) in its consideration of ESG factors.
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.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 www.dbrsmorningstar.com.
The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this 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. 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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