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CI Financial

CI Financial Cut to Junk by S&P Before Firm Drops Coverage

CI’s borrowing, which mounted as it went on an acquisition spree of US registered investment advisory firms, has become a concern for analysts and investors.

(Bloomberg) -- CI Financial Corp.’s debt was cut to junk by S&P Global Ratings after the Canadian asset manager asked S&P to stop rating its debt. The shares fell the most in nearly seven weeks. 

S&P lowered its issuer credit and senior unsecured debt ratings to BB+ from BBB- following a request from CI “to withdraw our ratings,” according to a statement late Monday. It then dropped coverage to fulfill CI’s wishes.  

The downgrade shows rising concern about CI’s more than C$4 billion ($2.9 billion) in debt, much of it incurred to pay for acquisitions of US registered investment advisory firms. The Toronto-based company, one of the largest nonbank sellers of mutual funds in Canada, has acquired dozens of wealth-management offices in recent years, hoping to find a new avenue for growth.

The strategy is the brainchild of Chief Executive Officer Kurt MacAlpine, who was hired in 2019 to take CI in a new direction after years of pressure on its core business from the growth of lower-cost investment products. 

The former McKinsey & Co. consultant and WisdomTree Inc. executive has also significantly restructured CI’s Canadian fund-management business, its largest division. Revenue and adjusted earnings per share have risen, but high leverage has weighed on the share price, which is down by about a third since MacAlpine joined the company. 

The downgrade reflected S&P’s expectation that CI will operate with debt of 4 to 5 times earnings before interest, taxes, depreciation and amortization over the next year, the ratings firm said. A spokesperson for CI didn’t respond to questions from Bloomberg on Tuesday. S&P didn’t reply to a request for comment. 

Shares of CI fell 5% to C$12.72 as of 12:18 p.m. in Toronto, the stock’s largest intraday drop since March 15 and the biggest decline of the 29 companies in the S&P/TSX Financials Index. The shares tumbled about 20% in the past year through Monday.

CI Financial has begun the process of taking public its US wealth-management business, a key step in its plan to raise money, reduce debt and separate its Canadian and US businesses. The firm hadn’t decided how many shares to sell or at what price as of its most recent conference call with investors in February. It also sold its minority stake in Boston-based Congress Wealth Management LLC, saying it made three times its initial investment, and will use the cash to repay debt. 

Read More: CI Financial’s US Deal Spree Gets a Cold Shoulder From Investors

CI still has investment-grade ratings from Moody’s Investors Service and DBRS Morningstar. The firm had C$391 billion of client assets under management as of March. 

“After announcing another acquisition in mid-March, spreads on bonds jumped, signaling increased concern about the level of debt with which CI is operating,” said Ethan Kaye, an analyst with Bloomberg Intelligence. “Funding for subsequent deals would likely be more expensive, with the rating downgrade echoing investor sentiment.”

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