DBRS Morningstar has downgraded the rating on CI Financial Corp. and its subsidiary, CI Investments Inc., to BBB from BBB (high) on concerns about the wealth management company’s debt.
DBRS also changed the trend on the rating to stable from negative.
The downgrade reflects CI’s “persistently high debt levels,” which grew by almost $2 billion over the past two years to $3.3 billion in the first quarter of this year, DBRS said Wednesday. CI’s gross debt-to-EBITDA ratio was 3.5x in Q1, it said.
Volatile markets haven’t helped, as CI saw net redemptions in Q1 and a 6% quarter-over-quarter decline in assets under management, the rating agency said. “This will pressure cash flows because [assets under management] are CI’s key source of fee-based income,” it added.
DBRS also said CI’s operational risk was “elevated” after several recent acquisitions of U.S. registered investment advisors.
However, those acquisitions have doubled CI’s assets under advisement over the past year, which will boost cash flows, DBRS said. CI also plans to reduce debt levels by selling up to 20% of its U.S. wealth management business in an initial public offering.
On an earnings call last month, CI CEO Kurt MacAlpine said the firm shifted its capital allocation strategy in Q1 toward paying down debt and ramping up share repurchases, as opposed to acquisitions.
“We’ve absolutely slowed down the pace of the acquisitions and focused on integrating,” MacAlpine said.
CI’s earnings are expected to benefit from the increase in wealth management assets, DBRS said, diversifying its revenue geographically and by product type, and allowing EBITDA to improve.
CI has a Baa2 rating and a stable trend from Moody’s, which said in April that CI’s plan to spin off part of its U.S. wealth management division was a positive for the firm.