Standard & Poor’s Ratings Services Wednesday raised its issuer credit rating on CI Financial Corp. (TSX:CIX) to the same level as its subsidiary, CI Investments Inc., saying that it has come to believe that the structural subordination between between the two firms is not material, as it initially thought.
In raising the rating, S&P said that it now doesn’t think there’s 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.”
The rating agency says that its 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, S&P adds. “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,” it says.
“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,” said Standard & Poor’s credit analyst Sebnem Caglayan.
S&P noted that it could raise the ratings on CI, if it 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, it could lower the ratings, it said.