The strength of underlying cash flows is key to rating Canadian income-fund market, says Standard & Poor’s Ratings Services.

In its inaugural report on the Canadian income-fund market, S&P says its stability ratings focus on the underlying resiliency of a fund’s distributable cash flow generation, therefore addressing both the sustainability of its distribution stream and the potential for negative variation from the established or expected trend. “Variability of distributions is an important consideration for investors,” it notes. “For example, in slightly more than eight months, 24 income funds decreased their distributions as a result of various reasons, which ranged from poor business performance to industry or economy wide trends.”

S&P says that, as of Aug. 31, there were 224 publicly listed income funds with a total capitalization of about $102 billion. The capitalization of the income fund market has nearly tripled from 2002 to 2004, which is a remarkable pace of growth. “A key component of the sector growth has been the income trust segment,” said Standard & Poor’s credit analyst Lorenzo Sliusarev.

“Compared to real estate investment trusts or royalty trusts, (which are primarily concentrated in the energy and resources sectors), income trusts generally cover a broader mix of income funds that typically operate as stand-alone going concern businesses or infrastructure developers,” Sliusarev says. Most of this leading growth can be attributed to the emergence of the business trusts segment, which came into being following numerous partial or whole corporate businesses conversions into income trust-type structures.