Dominion Bond Rating Service reports that it has downgraded Dundee Bancorp to BB (high) with a stable trend. DBRS is reducing the long-term rating of Dundee to BB (high) from BBB (low) and the prior negative trend is now stable.

“The change in the rating reflects the unfavourable profitability outlook, as the company is restructuring its operations to become a more competitive broad wealth management company,” says DBRS. “The prior negative rating trend assigned in January 2001, reflected DBRS’s concerns regarding Dundee’s slow growth, poor earnings, risks with the concentrated merchant banking portfolio and small size in relation to large international mutual fund competitors.”

The rating agency reports that the firm’s profit picture for the first six months of 2001 was not favourable, with Dundee reporting a loss of $4.8 million, and a further decline in cash flow. “There was optimism in
January, that net sales would begin to grow given the introduction of new products, but the company suffered net redemptions in first half 2001. Mutual fund monthly net sales recently turned positive. However, given that the company’s restructuring is taking place in the context of weak equity markets and an uncertain economic outlook, and with significant growth in the size of the sales distribution force yet to be achieved, it remains to be seen how successful Dundee will be in improving net sales.”

It also notes that investment gains from the merchant banking portfolio have declined from much higher levels earned in previous years and recent sharp market declines in natural resource holdings have contributed to a further unrealized market value decline in this sector of the portfolio.

“Dundee continues to have strong brands in Dynamic Power and Focus + mutual funds, and the financial risk and liquidity profiles continue to remain satisfactory, with a large segment of assets represented by marketable securities and investments in public companies.”