CF.PR.A: DBRS Confirms at Pfd-3(low); Trend Now Negative

DBRS has announced:

has today confirmed the Pfd-3 (low) rating on the Cumulative Preferred Shares of Canaccord Financial Inc. (Canaccord or the Company) following the announcement on December 15, 2011, that the Company would be acquiring Collins Stewart Hawkpoint plc (Collins Stewart) for consideration worth £253 million, or $407 million. However, the trend has been changed to Negative, given the relative size of the transaction, the current economic and market environment, and some ambiguity with respect to the longer-term financing of the cash portion of the transaction. Once Canaccord demonstrates that a successful integration has been achieved and that longer-term take-out financing has been provided, the Stable trend should be readily re-assigned, all else being equal. Today’s rating action follows additional analysis conducted by DBRS on the transaction, as well as an assessment of the acquired company, and clarifying discussions with the Canaccord management team.

On a pro forma basis, using the last 12-month results for both companies, the combined company would have had a debt plus preferred share capital ratio of 23.2% and a debt plus preferred-to-EBITDA ratio of 1.3 times. The pro forma fixed charge coverage ratio, assuming the incremental $150 million preferred share issue, is 9.0 times, which remains reasonable for the rating. While the acquisition stresses the Company’s financial flexibility in the current environment, there is a strong case to be made for the acquisition from a strategic perspective.

Benefiting from revenue and expense synergies associated with larger and more diversified operating platforms, the Company is well-positioned to grow its revenues and earnings substantially when the global capital markets stabilize. In the meantime, the more stable wealth management and advisory revenues of Collins Stewart add favourable diversification to the Company’s overall business risk profile, which otherwise remains concentrated in the small and mid-cap Canadian equity markets. While the Pfd-3 (low) rating with a Stable trend assigned to the Canaccord preferred shares in June 2011 took into account anticipated volatility associated with broker-dealers, this material acquisition in the current uncertain economic and market environment introduces an additional degree of risk that cannot be ignored. The ambiguity regarding longer-term take-out financing was also a consideration in assigning a Negative trend at this time.

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