TEXT-S&P raises CI Financial Corp rating to 'BBB+'
Overview -- 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. Rationale 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 subsidiary. 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. Outlook 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 Upgraded 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 column.
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