TEXT-S&P raises CI Financial Corp rating to 'BBB+'

Wed Nov 7, 2012 4:31pm EST
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     -- In our view, CI Investments Inc. (CII) does not face any material 
regulatory barriers in making payments to its holding company, CI Financial 
Corp. (CI). Structural subordination exists when there are regulatory 
restrictions on the operating subsidiary's ability to upstream dividends to 
the holding company.
     -- CII is only required to maintain positive working capital plus 
$100,000 to remain registered as an investment manager, which is not much of a 
hurdle and is really intended to keep very small firms in line.
     -- We are raising the issuer credit rating on CI Financial to 'BBB+' from 
'BBB', and we are affirming our issuer credit rating on CI Investments and 
debt ratings on both institutions at 'BBB+'.
     -- The outlook is stable, reflecting our expectation that CI will 
continue to generate strong cash flows from operations, even in moderately 
volatile markets, to fund its day-to-day operations and to service existing 
debt obligations.

Rating Action
On Nov. 7, 2012, Standard & Poor's Ratings Services raised its issuer credit 
rating on CI Financial Corp. to 'BBB+' from 'BBB'. The outlook is stable. At 
the same time, we affirmed our 'BBB+' issuer credit rating on its subsidiary, 
CI Investments Inc., and senior unsecured debt ratings on both CI and CII.

The upgrade reflects our view that, based on our group rating methodology for 
financial institutions (see "Group Rating Methodology And Assumptions," 
published Nov. 9, 2011), the structural subordination between CI Investments 
Inc. (CII, the operating subsidiary) and CI Financial (CI, the non-operating 
holding company) is not material, as we initially thought.

We do not think that there is structural subordination between CII and CI 
because there are no regulatory restrictions on the operating subsidiary's 
ability to upstream dividends to the holding company. CI Financial receives 
dividends and interest from CII to meet its interest payments and to pay 
dividends to its shareholders. However, there are no restrictions on CI's 
ability to access those funds, so we now believe the operating company and 
holding company should be rated at the same level. 

We continue to base the ratings on CII on our view that it is a core 
subsidiary of its parent, CI. CI Investments' assets under management (AUM) 
represented approximately 85% of total AUM, and the operating subsidiary 
contributed 88% of the consolidated entity's revenue in the first nine months 
of 2012. Management is fully committed to this business, in our opinion. We 
also believe it would be very difficult for CI to sell CI Investments, since 
CI has 100% ownership of CI Investments and it is CI's main operating 

Standard & Poor's ratings on CI Financial are based on the company's solid 
franchise in the Canadian asset management industry and its effective 
multichannel distribution strategy, which includes an exclusive distribution 
agreement with Sun Life Financial. The ratings also take into account the 
company's good financial profile, including its strong cash flows from 
operations to service debt. However, several factors offset these strengths. 
The competitive and relatively small Canadian market in which CI operates and 
the moderately high concentration of equities within total AUM lead to 
potential earnings volatility. Additionally, on-balance-sheet liquidity is 
modest, and tangible equity is negative, although the latter is a secondary 
ratings consideration.

In our opinion, CI has a strong franchise and favorable reputation in Canada 
for both its internal and subadvised investment manager brands. The company is 
the third-largest asset manager in Canada, with C$73.9 billion of AUM and an 
approximate 10% market share as of Sept. 30, 2012. In addition, CI administers 
C$22.2 billion of client funds through its Assante Wealth Management unit as 
of the same date.

CI's product offerings are fairly diverse. It primarily offers mutual funds 
for retail customers, but it also offers separately managed accounts for both 
institutions and high-net-worth individuals in Canada with an effective 
multibrand and multichannel distribution strategy. However, equities comprise 
66.1% of AUM, a moderately high concentration that could lead to earnings 
volatility, especially considering the Canadian stock market's concentration 
in natural resources and financial institutions. But nearly half of AUM is 
invested outside of Canada, providing some geographic diversification.

CI generates strong operating cash flows for servicing its debt obligations 
and funding day-to-day operations. Profitability and cash flow metrics were 
relatively strong compared with other rated asset managers in the first nine 
months of 2012. The EBITDA margin was 39.8% (39.7% in 2011), and EBITDA 
interest coverage was 23.06x (21.55x in 2011). 

Offsetting the strong operating performance is CI's balance sheet, which 
carries a moderate debt load and modest liquidity. Par value debt totaled 
C$750 million as of Sept. 30, 2012. But the strong cash flows from operations 
result in debt leverage of 1.30x, which compares well with other companies 
rated 'BBB+'. Cash and cash equivalents were approximately C$154.2 million at 
the end of the third quarter. We expect cash on hand to decline as the company 
uses a portion of its cash to pay down the $250 million debt maturing in 
December 2012. The company plans to either use its undrawn revolver or issue 
new debt to pay a portion of this maturity.

As of Sept. 30, 2012, CI's tangible equity was negative C$500.8 million, the 
consequence of goodwill and intangible assets, which the company generated by 
several of its acquisitions in the recent past, the most recent being Hartford 
Investments Canada Corp. in December 2010. But, in our view, asset managers 
having negative tangible equity is not a primary concern because we focus our 
analysis on the predictability and sustainability of cash flow generation. 
That being said, we believe a minimum of positive tangible equity is necessary 
to absorb unexpected losses.

The stable outlook reflects our expectation that the company will continue to 
generate strong cash flows from operations, even in moderately volatile 
markets, to fund its day-to-day operations and to service existing debt 
obligations. We could raise the ratings if CI is able to diversify its 
business mix, grow its AUM and market share in the Canadian market 
significantly, and improve its financial profile, including its 
on-balance-sheet liquidity and tangible equity. If the company experiences 
significant outflows and issues a sizable amount of debt to finance either a 
large acquisition or an aggressive share repurchase program, we could lower 
the ratings.

Related Criteria And Research
     -- Group Rating Methodology And Assumptions, Nov. 9, 2011
     -- Rating Asset Management Companies, March 18, 2004

Ratings List

                                     To                 From
CI Financial Corp.
 Issuer Credit Rating                BBB+/Stable/--     BBB/Stable/--

Ratings Affirmed

CI Investments Inc.
 Issuer Credit Rating                BBB+/Stable/--     

CI Financial Corp.
CI Investments Inc.
 Senior Unsecured                    BBB+               

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left