DBRS Morningstar Confirms Power Corporation of Canada at “A” and Pfd-2, Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Power Corporation of Canada’s (POW or the Company) Issuer Rating and Senior Debt rating at “A.” DBRS Morningstar also confirmed POW’s Non-Cumulative First Preferred Shares and Cumulative Redeemable First Preferred Shares, 1986 Series ratings at Pfd-2. All trends are Stable.

KEY RATING CONSIDERATIONS
The rating confirmations reflect POW’s excellent franchise in life insurance and asset management across several key markets in Canada, Europe, and the United States. The Company benefits from a conservative risk profile and resilient earnings amid the Coronavirus Disease (COVID-19) global pandemic, while traditionally having healthy levels of liquidity and steady dividend flows from its operating companies. POW’s Stable trends correspond to the Stable trends of its main operating company, Great-West Lifeco Inc. (GWO; rated A (high) with a Stable trend by DBRS Morningstar).

RATING DRIVERS
POW’s ratings reflect those of its main operating company, GWO. An upgrade of GWO’s ratings would likely result in an upgrade of POW’s ratings.

Conversely, a downgrade of GWO’s ratings would result in a downgrade of POW’s ratings. A sizable shift in the Company’s risk profile resulting from a major divestiture or acquisition, a material increase in unconsolidated financial leverage, or evidence of deterioration in governance controls across the Company would also result in a ratings downgrade.

RATING RATIONALE
DBRS Morningstar’s rating assessment of POW is largely derived from the Company’s 100% equity interest in Power Financial Corporation (PWF; rated A (high) with a Stable trend by DBRS Morningstar), which, in turn, has controlling interests in GWO and IGM Financial Inc. (IGM; rated A (high) with a Stable trend by DBRS Morningstar), two of Canada’s largest financial institutions in the insurance and asset management industries, respectively. Because GWO is the greatest contributor to the earnings and overall strength of PWF and, consequently, of POW, DBRS Morningstar’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 “DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships” because of structural subordination. Additionally, DBRS Morningstar rates PWF’s Issuer Rating at the same level as GWO’s Issuer Rating of A (high).

POW is a corporate holding company that the Desmarais family has controlled since 1968, with PWF as the Company’s major asset. Following a minority shareholders reorganization in early 2020, POW now owns 100% of PWF, and the shares of the latter were delisted from the Toronto Stock Exchange. As part of the reorganization, PWF minority shareholders received 1.05 subordinate voting share of POW and nominal cash per PWF share. Through PWF, POW is indirectly invested in GWO, the largest life insurance operation in Canada, and IGM, Canada’s largest non-bank-owned wealth and asset management company. Furthermore, POW has significant holdings in a portfolio of global companies based in Europe through its investment in Groupe Bruxelles Lambert S.A. Aside from PWF, POW’s other interests include Sagard Holdings (a multistrategy alternative asset manager with a presence in North America, Europe, and Asia); Power Sustainable Capital (global multiplatform alternative asset manager with investments in sustainable strategies); a minority ownership in China AMC, a Chinese asset management company (POW and IGM own a combined 27.8% interest in China AMC); and other investments. The Company’s strategy of having significant interests in many of its investments allows it to contribute meaningfully to their management and influence strategic decisions.

DBRS Morningstar thinks that POW benefits from a strong capital position and prudent decision making. On a stand-alone basis, the Company’s financial profile is conservative. Financial leverage, as measured by debt plus preferred shares-to-capital, was minimal at 7.9% as at the end of Q3 2020. At 10.9%, the nine months ended September 30, 2020 (9M 2020), return on equity (ROE) proved resilient during the global pandemic so far, with the strength of earnings coming from GWO and IGM, remaining slightly above the average return for the last five years. The Company’s interest payments on its senior debt and dividend obligations on its perpetual preferred shares remain well covered (20.3 times as at 9M 2020). The Company’s liquidity was good, with $214 million in nonconsolidated cash and short-term investments at the holding company level as at September 30, 2020, as well as an additional $1 billion at PWF. DBRS Morningstar notes that following the reorganization completed in Q1 2020, POW has not received dividends in the second or third quarters of 2020. Instead POW received $664 million in advances from PWF against promissory notes. The Company expects that the dividend flow from PFW will resume in early 2021 once POW directly holds all outstanding common shares. At that time, PFW is expected to declare a dividend to POW, which would be offset against the promissory note outstanding with no impact on cash balances.

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 methodologies are the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (July 21, 2020) https://www.dbrsmorningstar.com/research/364260/global-methodology-for-rating-life-and-pc-insurance-companies-and-insurance-organizations, DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020) https://www.dbrsmorningstar.com/research/369165/dbrs-morningstar-criteria-preferred-share-and-hybrid-security-criteria-for-corporate-issuers, and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020) https://www.dbrsmorningstar.com/research/369167/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships.

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 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.

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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