DBRS Confirms Ratings of Power Corporation at A (high), Pfd-2 (high)

DBRS has today confirmed the Senior Debt and preferred shares ratings of Power Corporation of Canada (POW or the Company) at A (high) and Pfd-2 (high), respectively. The trends on the ratings remain Stable. The credit strength of POW is directly tied to its roughly two-thirds equity interest in Power Financial Corporation (PWF), which represents a substantial majority of the Company’s earnings and cash flow, as well as the Company’s estimated net asset value. The Senior Debt rating of the Company is A (high), or one notch below the AA (low) rating on the Senior Debentures of PWF, reflecting the structural subordination of the holding company’s obligations.

The Company remains exposed to the advice-centred distribution model of protection and wealth management products and services through its indirect investment in PWF’s major subsidiaries: Great-West Lifeco Inc. (GWO; senior debt rated AA (low)), one of the three largest life insurance concerns in Canada, and IGM Financial Inc. (IGM; senior debt rated A (high)), one of the largest mutual fund complexes in Canada. The Company has achieved modest industry and geographic diversification through the Pargesa Holding S.A. (Pargesa) segment of PWF (largely focused on European industrial products), a variety of investments in China and Hong Kong, direct investments in media and renewable energy and various equity investment vehicles focused on small- and medium-sized companies in Europe and the United States. These investments are not expected to generate meaningful earnings or cash flow contributions for the Company in the near term. However, over time, the value-based approach to investing, in addition to the Company’s active shareholder interests, should create additional shareholder value.

As the controlling shareholder of PWF and, by extension, of GWO and IGM, POW defines the strategic vision for its financial services investments, while setting the “tone from the top” in terms of conservative management style and risk analysis and tolerance. The Company’s senior officers and delegates exercise a greater degree of influence through their active participation on the respective boards and board committees of POW’s various subsidiaries than is generally the case at more widely held companies. Such an integrated management and governance approach is seldom encountered and has served the Company’s stakeholders well.

The POW group of companies (the Group) is controlled by the Desmarais family and managed by an inner circle of long-serving professional managers. DBRS notes that the Group includes a large, multi-level ownership structure, the complexities of which can introduce risks in governance and consequently overall stability if not run very well. While there is no evidence that control, governance and succession issues are a cause for concern (on the contrary, the financial results for the Group and its shareholders are consistently excellent), such issues can be a challenge for closely held groups.

On a stand-alone basis, POW’s financial profile of debt and preferred shares in the capital structure is conservative. Financial leverage appears to mainly be used to fund a portfolio of cash and short-term investments and a modest level of working capital. The Company’s liquidity is strong, with around $550 million in cash and short-term securities at June 30, 2014.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Holding Companies and Their Subsidiaries, which can be found on our website under Methodologies.