DBRS Confirms Ratings of Power Corporation at “A,” Pfd-2

DBRS Limited (DBRS) has today confirmed Power Corporation of Canada’s (POW or the Company) Senior Debt rating at “A” and its Preferred Shares ratings at Pfd-2. All trends are Stable. DBRS’s rating assessment of POW is largely derived from the Company’s 65.6% equity interest in Power Financial Corporation (PWF), which, in turn, has controlling interests in Great West Lifeco Inc. (GWO) and IGM Financial Inc. (IGM), two of Canada’s largest financial institutions and leaders in their respective industries. Since GWO is the greatest contributor to the earnings and overall strength of PWF and consequently PWO, DBRS’s “Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations “is the primary methodology for rating POW.

The ratings for POW are one notch below PWF’s ratings under the holding company criteria because of structural subordination. Additionally, PWF’s rating has been set at the same level as GWO’s Issuer Rating. For more information, see the press releases “DBRS Confirms Ratings on Power Financial Corporation” and “DBRS Confirms Ratings of Great-West Lifeco Inc. and Affiliates.”

POW is an investment holding company controlled by the Desmarais family, with PWF as its major holding (DBRS calculates PWF to comprise 78% of POW’s net asset value). Through PWF, POW is indirectly invested in GWO, one of the three largest life insurance companies in Canada; IGM Financial Inc. (IGM), a leading Canadian asset manager; and Pargesa Holding S.A. (Pargesa), a Swiss holding company with indirect interests in various largely European-based global companies through Groupe Bruxelles Lambert. Aside from PWF, POW’s other interests include the Sagard Investment Funds (equity investment funds focused in Europe, the United States and China), Power Energy (renewable energy), Square Victoria Communications Group (media) and other investments, including a 10% interest in China AMC, an asset management company. These investments have grown in value and management expects them to generate more earnings or cash flow contributions for the Company in the near to medium term. Management’s value-oriented investment approach, in addition to the Company’s active shareholder interests, should create additional shareholder value over time.

The large proportion of earnings from GWO and IGM expose the Company to the advice-centred distribution model of protection and wealth management products and services. The Company is cognizant of emerging issues and challenges in the financial services industry presented by the low-rate environment, changing regulatory requirements, new technological capabilities and shifts in customer preferences. The Company is confident, however, in its long-term strategic vision of being the leading financial services provider in the markets that it participates in. Demographic trends, including an aging baby-boomer cohort, are expected to increase demand for financial advice and wealth management products.

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.

POW benefits from a strong capital position, high liquidity and prudent decision making. On a stand-alone basis, POW’s financial profile is conservative. Financial leverage, as measured by debt plus preferred shares-to-capital, is low at 9.8% (at September 30, 2016) and is mainly used to fund a portfolio of cash and short-term investments and a modest level of working capital. Interest payments and dividend obligations on the Company’s perpetual preferred shares are well-covered (13.7 times at 9M 2016) on an earnings basis. The Company’s liquidity is strong, with $819 million in cash and short-term securities at September 30, 2016. At 6.5%, 9M 2016 return on equity (versus 16.7% at 9M 2015) is lower than usual as a result of a large impairment charge at Pargesa (due to an accounting recognition of an unrealized decline in value of a holding in the recently merged LafargeHolcim), as opposed to higher-than-usual investment income in 2015 from realized investment gains in the Company’s Chinese investments.

RATING DRIVERS

Negative ratings pressure may arise from a downgrade of PWF’s or GWO’s ratings, from deteriorating earnings and prolonged distress at any of the major operating subsidiaries, or from a shift in the Company’s risk profile resulting from a major divestiture or acquisition. POW’s ratings could also be negatively affected by evidence of governance and control issues. Conversely, an upgrade of PWF could potentially benefit POW’s rating.

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 on the issuer page at www.dbrs.com.

The applicable methodologies are DBRS Criteria: Rating Holding Companies and Their Subsidiaries (January 2016), Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015) and Rating Companies in the Asset Management Industry (December 2015), which can be found on our website under Methodologies. In addition, the DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (January 2016) is used to assess the preferred shares.

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

Lead Analyst: Stewart McIlwraith
Rating Committee Chair: Roger Lister

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.