DBRS Morningstar Confirms Ratings on IGM Financial Inc. at A (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed IGM Financial Inc.’s (IGM or the Company) Issuer Rating and Unsecured Debentures rating at A (high). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The rating confirmations and Stable trends take into consideration IGM’s leading position as a nonbank affiliated investment management company in Canada, where it has a sizable presence in both the asset management and wealth management segments. The Company has demonstrated a proven ability to consistently grow its assets under management and advisement (AUM&A) base despite periods of market uncertainty. IGM’s ratings also benefit from its growing portfolio of strategic investments, with the Company’s operating model increasingly diversified both geographically and by product type. Additionally, IGM has demonstrated consistent strong profitability over the years, as measured by its EBITDA margin and return on equity values. The Company’s financial profile is conservative, with a moderate amount of leverage and a strong ability to service its interest and debt obligations. Both assets managed by the Company and assets on the balance sheet are largely liquid and/or low risk, reducing market and credit risk. The ratings are also affected by the nature of the Company’s business model, which remains vulnerable to broader macroeconomic conditions and broader industry trends that pressure active asset managers. DBRS Morningstar believes IGM is well positioned in the asset management and wealth management space and can sustain future profitability if it maintains its scale advantage and continues to manage expenses in a prudent manner.

CREDIT RATING DRIVERS
A further increase in scale, as evidenced by higher AUM&A, while maintaining strong profitability and balance sheet metrics would result in a ratings upgrade. Conversely, sustained net outflows affecting the Company’s profitability or material losses related to investments in associates (strategic investments) that significantly affect earnings and capital would result in a ratings downgrade.

CREDIT RATING RATIONALE
The ratings and Stable trends reflect the Company’s position as one of the largest asset and wealth management companies in Canada with $261 billion in total AUM&A as of June 30, 2023 (not including its proportionate share of AUM&A through strategic investments). The Company benefits from a strong franchise in Canada through its main operating subsidiaries, Mackenzie Financial Corporation (Mackenzie), IG Wealth Management, and Investment Planning Counsel Inc. (discontinued operations as of March 31, 2023, per IGM’s Q1 2023 reporting). In addition, IGM benefits from its strategic investments in China Asset Management Co. Ltd., Great-West Lifeco Inc. (Great-West; rated A (high) with a Stable trend by DBRS Morningstar), Wealthsimple, Northleaf Capital Partners Ltd., and most recently, Rockefeller Capital Management (RCM). IGM is ultimately controlled by Power Corporation of Canada (rated “A” with a Stable trend by DBRS Morningstar).

IGM’s strong franchise in Canada allows the Company to generate good levels of operating cash flow and solid profitability metrics, including a consistent return on common equity in the midteens for the past decade. The Company’s strong earnings can be attributed to a growing AUM&A base, a diversified and expanding product suite, good expense management, and a business model that incentivizes the stickiness of assets. DBRS Morningstar also notes IGM’s profitability and AUM&A have remained resilient during a challenging operating environment in 2022, as strong retention of assets at IG Wealth Management more than offset net outflows at Mackenzie. At $381.3 million, Q1 2023 net earnings benefitted from a one-time gain on the sale of Great-West shares of $174.8 million, net of tax. Profitability is likely to improve over the medium to long term as the Company makes continued progress on several expense management initiatives, including further streamlining and simplifying its operating model.

IGM has also strengthened its enterprise risk management framework over the past few years and has diversified its traditional business focus by strategically investing outside of Canada and in private markets. The Company’s recent investment in RCM furthers its strategic plan to (1) diversify its earnings geographically into the U.S. hybrid registered investment advisor market and (2) grow its expertise in products targeted at the high-net-worth and ultra-high-net-worth market segments.

DBRS Morningstar views IGM’s liquidity position as strong/good. The Company benefits from ample cash and cash equivalents on its balance sheet, as well as good access to capital markets and committed lines of credit. The Company’s minority ownership of Great-West provides additional liquidity in case of a stress scenario. Also, its financial flexibility is good thanks to its ample capital generation and conservative debt-to-EBITDA ratio of 1.48 times (x) for FY 2022. The RCM transaction will likely increase IGM’s leverage, as measured by the debt-to-EBITDA ratio, on a pro forma basis, but it will remain below 2x.

IGM’s strong EBITDA margins reflect its diversified operating model and good expense management. Additionally, its leading market position has helped the Company to maintain AUM&A levels through periods of market volatility and achieve consistent profitability in recent years. However, similar to other asset and wealth management companies, IGM’s revenue and cash flows are primarily based on AUM&A, which remain vulnerable to either net outflows and/or declines in market values. These concerns are mitigated by IGM’s conservative financial profile, as well as its substantial available liquid resources. However, the current operating environment remains challenging for traditional asset managers, which continue to face competition from lower-fee passive investment strategies. Moreover, the Company also faces the possibility of sustained net fund outflows and lower profitability in an environment marked by investor caution and an uncertain economic outlook.

ENVIRONMENTAL, SOCIAL, AND 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/416784 (July 4, 2023).

The Grid Summary Grades for IGM are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Strong; Risk Profile – Strong/Good; Funding/Liquidity – Strong/Good; and Capitalization – Strong.

Notes:
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 (July 4, 2023; https://www.dbrsmorningstar.com/research/416784) 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 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 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 credit 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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