PrefBlog

DBRS has announced that it:

confirmed the Cumulative Preferred Shares rating of Canaccord Genuity Group Inc. (CF or the Company) at Pfd-3 (low). The trend has been revised to Stable from Negative. The Company’s Support Assessment is SA3.
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The ratings also consider the headwinds facing CF that have driven weak results and low returns in recent years. DBRS sees inconsistent profitability as a concern at the current rating level and will look for continued success in the wealth management business to drive consistent earnings. While CF’s wealth management expansion is contributing to earnings stability, it has also resulted in increased debt levels and lower tangible common equity, which is also factored into the current rating level.
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Demonstrating its franchise diversification, CF reported 71% of its capital-markets revenues were generated outside Canada and 88% of investment-banking and advisory revenues were from sectors outside resources. The Company’s increasing business and geographic diversification has helped to offset headwinds in its traditional Canadian market.
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DBRS notes the risk in managing important relationships and, although the Company has procedures in place to manage its inventory positions, it maintains aged positions resulting from activities undertaken to support clients that bring important business to CF. These positions have the potential to experience mark-to-market losses. Given the challenging operating environment, properly assessing counterparty risk, including a counterparty’s ability to meet margin calls, remains critical.
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Given the nature of the business and a relatively liquid balance sheet that includes cash and other liquid assets, liquidity is good. As of June 30, 2018, the Company had sufficient cash and liquid assets to meet any short-term liability needs. Furthermore, cash flows have generally been positive and the fixed-charge coverage ratio continues to improve.

Capitalization is satisfactory with a total assets/total common equity ratio of 6.9 times, which is generally in line with recent leverage levels. Tangible common equity has weakened with the acquisition of Hargreave Hale and the associated goodwill. As of Q1 2019, tangible common equity/tangible assets of 5.3% is low compared with historical levels, averaging 6.6% over the past five full fiscal years. Long-term debt as a percentage of total capitalization is also increasing with higher debt levels, though DBRS sees this as acceptable, given that leverage is used to grow the wealth management business. Importantly, working capital of $564 million is good and capital levels remain well above regulatory net-capital requirements.

Affected issues are CF.PR.A and CF.PR.C.

This entry was posted on Monday, August 20th, 2018 at 5:18 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.