DBRS Morningstar Maintains GMP Capital Inc.’s Under Review with Developing Implications Status

DBRS Limited (DBRS Morningstar) maintained the Under Review with Developing Implications status on GMP Capital Inc.’s (GMP or the Company) Cumulative Preferred Shares rating of Pfd-4 (high).

DBRS Morningstar initially put GMP’s rating Under Review with Developing Implications on June 18, 2019, following the Company’s announcement that it had agreed to sell substantially all of its capital markets business to Stifel Financial Corp. Subsequently, DBRS Morningstar maintained the Under Review with Developing Implications status on September 18, 2019, as the sale transaction had yet to close. The sale transaction was completed on December 6, 2019; however, DBRS Morningstar maintained the Under Review with Developing Implications status again on December 17, 2019, as the Company was still in discussions with Richardson Financial Group Limited (RFGL) to consolidate full ownership of Richardson GMP Limited (Richardson GMP). On February 26, 2020, GMP announced that it had entered into a nonbinding term sheet with RFGL to consolidate the ownership of Richardson GMP. DBRS Morningstar once again maintained the Under Review with Developing Implications status on March 17, 2020, as GMP had called a special meeting of common shareholders on April 21, 2020, to approve the consolidation.

However, in light of concerns over the Coronavirus Disease (COVID-19), GMP postponed the special meeting. All three of Richardson GMP’s shareholder groups (GMP, RFGL, and two elected investment advisor representatives on the board of RGMP) agreed to extend the contractual negotiation period between GMP and RFGL. This agreement was set to occur on April 16, 2020, and has been extended until 60 days following the date that the Declaration of Emergency ordered by the Lieutenant Governor of Ontario has been withdrawn or terminated by the Government of Ontario. In the interim, the parties involved (GMP, RFGL, and the Richardson GMP investment advisors) continue to work toward entering into a definitive agreement, but without any assurances about the outcome of these discussions.

Under the terms of the proposed transaction, GMP will acquire all common shares of Richardson GMP that it does not already own (65.5% stake). The DBRS Morningstar-rated Cumulative Preferred Shares would remain with the consolidated entity.

KEY RATING CONSIDERATIONS
While DBRS Morningstar would ideally like to resolve this Under Review with Developing Implications status as quickly as possible, the ratings implications for GMP remain unclear. The continued Under Review period considers that the consolidation of GMP with Richardson GMP has yet to be finalized. DBRS Morningstar will assess GMP’s pro forma structure once it consolidates full ownership of Richardson GMP. This assessment will review the Company’s assets and liabilities composition, ownership, future strategic direction, and management’s ability to execute on this plan. If the consolidation were not to occur, DBRS Morningstar would need to assess GMP’s standalone intrinsic strength, including its credit fundamentals, prospects for growth, and ability to maintain debt service payments on its Cumulative Preferred Shares.

RATING DRIVERS
DBRS Morningstar would upgrade the rating on GMP if the Company’s franchise prospects and post-transaction pro forma financials are deemed to be stronger with the consolidation of Richardson GMP. Conversely, DBRS Morningstar would downgrade the rating if GMP’s credit fundamentals weaken. Additionally, negative rating pressure could emerge if the current transaction does not conclude as expected.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.

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.dbrsmorningstar.com.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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