DBRS downgrades ratings for CI

The downgrades stem from the rating agency’s concern that rising debt levels at CI “have led to deterioration in the company’s financial flexibility as indicated by its leverage and fixed-charge coverage ratios,” DBRS says in a news release.

In the second quarter, CI’s debt-to-EBITDA ratio was 1.56 times, up from 1.29 times at the end of 2017, DBRS says, adding that this ratio is “commensurate with a lower rating category.” CI’s debt-servicing capacity “is declining with its rising debt levels,” DBRS says.

“There are concerns about the amount of dividends and share buybacks being paid out to shareholders. This amount also continues to materially exceed net income and free cash flow, as was evidenced in the last three quarters. By reducing its equity capital and increasing debt, CI is reducing its financial flexibility,” the rating agency says.

DBRS says that CI is “pursuing an aggressive strategy” with its plans to buy back up to $1 billion in shares over the next 12 months to 18 months. It notes CI already bought more than $300 million worth of its own shares in the first half of 2018.

“Although the company is currently able to comfortably cover its debt-servicing payments due to good market performance overall, there is the risk that a stressed market environment leading to a decline in assets under management (AUM) may result in declining revenues,” DBRS says.

The rating agency’s continued negative outlook for the ratings reflects “the deteriorating trend in the company’s financial flexibility and the persistence of redemptions exceeding gross sales at the company. This persistence could pressure earnings as fee-based revenues on managed assets comprise the majority of CI’s revenue,” DBRS says.

However, positive ratings pressure could arise if CI demonstrates, “a material reduction in leverage,” or an improvement in “the volume of redemptions relative to gross sales,” DBRS says.