Rating agencies have passed judgment on Power Corp., Power Financial Corp. and Brascan Financial Corp.

Standard & Poor’s Ratings Services has affirmed its ratings on Power Corp. of Canada and Power Financial, but the outlook on both is negative. Dominion Bond Rating Service, meanwhile, has confirmed all ratings on Brascan Financial, with trends remaining stable.

S&P credit analyst Donald Chu said in a report the ratings on Quebec-based Power reflect “the diversity of the companies’ holdings, the steady dividend stream from their major subsidiaries, high level of balance-sheet liquidity, strong core earnings positions, and demonstrated success in creating value through their various subsidiaries.”

“These ratings also reflect the structural subordination of these holding companies to the debts of their major operating subsidiaries, but is offset somewhat by the diversification effect of the group’s investments in North America, Europe, and Asia, and the strong balance-sheet positions maintained by Power,” Chu added.

S&P says that the financial performance of Power Corp. and Power Financial continues to reflect the underlying operating performance of their primary subsidiaries, Great-West Lifeco Inc. and IGM Financial Inc. Power Financial represents almost 90% of Power Corp.’s assets, and Great-West Lifeco Inc. and Investors Group Inc. represent over 90% of Power Financial’s assets. Both principal subsidiaries have very stable core earnings profiles and have shown strong financial performance over the past decade, it says.

The rating agency notes that Power Corp. has been under the same ownership and management since 1968 and has had a very strong track record of making prudent, profitable, and strategic long-term investments, while maintaining conservative financial practices. Historically, Power Corp. and Power Financial have maintained substantial levels of cash and short-term investments on their balance sheets, it says. Power’s operating performance for the first six months of 2004 remains within S&P expectations.

It anticipates that the Power group of companies will continue to strengthen their balance-sheet positions over the short to medium term, to be positioned for continued consolidation in the North American financial services sector, and to allow for the expansion of their investment portfolios in Europe and the Far East.

The negative outlook on Power reflects the reduced margin of tolerance should earnings, financial leverage, and capitalization not remain on a favorable trajectory. As well, Power’s outlook remains dependent on the outlook and ratings of Great-West Lifeco Inc. and IGM Financial Inc. given the relative size of these investments.

DBRS said that Brascan Financial continues to make slow, steady progress in improving its profitability, and it has extended its movement from direct investments into a fund management structure, whereby it co-invests along with third-party investors. DBRS says it views the move favorably on three counts: the addition of fee income into the revenue mix provides more stability to earnings, the arrangements allow more flexibility with respect to funding investments and also allow the managers to react more quickly as opportunities arise, and the strategy provides BFC with additional opportunities to diversify company-specific risk.

DBRS notes that many of the funds remain relatively small with growth potential. However, at this point, fee income generated from third party assets appears to be a relatively small component of the company’s revenue stream.

As a member of the Brascan group, BFC benefits from referral business and the knowledge and expertise that the group has in areas such as real estate, power generation, and natural resources. While there are no guarantees or support agreements in place, BFC is wholly owned by the parent, which also holds some BFC junior preferred shares. Historically, the Brascan group has been supportive and DBRS expects this to continue.

Balance sheet leverage has increased over the past two years, largely through increased capital markets activity within the hedge funds, DBRS notes. Still, it says that it remains comfortable at current levels with the increase in leverage that is expected. Historically, BFC has made significant direct investments in turnaround situations, it says. “While the company has had some success with the investments, the investments are, by definition, higher risk in nature and carry the risk of significant economic loss as well as profits.”