Echelon, BLG team up to create “capital pool company”

Canada’s two big independent investment banks — Vancouver-based Canaccord Genuity Group Inc. and Toronto-based GMP Capital Inc. — are being hit hard by the ongoing turmoil in the resources sector and their earnings are likely to remain under pressure, according to a new report from DBRS Ltd. published on Monday.

Specifically, the current market environment is having an “outsized impact on the independent investment banks” in Canada because of their heavy reliance on resources-related companies, the Toronto-based credit-rating agency says in its report.

“While the independent investment banks play an important role in the Canadian capital markets, they are less diverse than their large bank peers, and their revenue streams have been significantly impacted by still soft commodity prices,” the DBRS report says.

Although the firms are trying to diversify their businesses, “the challenges facing these institutions have been overwhelming to earnings,” the DBRS report says, noting that both firms have reported consecutive net losses.

Their restructuring efforts are “appropriate from a franchise perspective, but the retrenchment is distracting and costly, at a time when headwinds remain significant,” the report says.

DBRS doesn’t expect the current environment for these firms to change any time soon, the report says, so the credit-rating agency sees a “challenging road ahead” for the firms. Although DBRS doesn’t have any immediate concerns about their credit ratings, “If these institutions continue to be loss-making, further reducing total equity levels and increasing leverage, their ratings would likely come under pressure,” the report concludes.

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