Kurt MacAlpine, CEO of CI Financial, sits in the company's offices in downtown Toronto on Dec. 20, 2019.Tijana Martin/The Globe and Mail
CI Financial Corp. CIX-T chief executive officer Kurt MacAlpine says he is comfortable with the company’s current debt levels, although the market reaction to its recent financial results suggests others are not.
Canada’s largest independent asset manager is under pressure from credit rating agencies to pay down the debt that it took on as it purchased more than 30 wealth management companies, most of which were in the United States, over roughly three years. From the end of 2019 to the end of 2022, CI’s debt rose to $4.2-billion from $1.6-billion. The burgeoning U.S. business, dubbed Corient Private Wealth LLC, is at the core of Mr. MacAlpine’s growth strategy for one of Canada’s oldest money management companies.
CI tapped the brakes on its acquisition strategy and chipped away at the borrowings in the past two years as investors, troubled by the company’s debt load, sent CI shares to multiyear lows. The shares had been making a comeback in 2024, but CI’s first-quarter results reversed that as the company showed slightly higher debt levels and worsening credit metrics. Long-term debt went up in the quarter by $100-million to $3.6-billion at March 31.
CI stock fell as much as 12.5 per cent in the two days after Thursday’s earnings report before ticking back up by 0.88 per cent Monday.
Debt-rating agency Moody’s Ratings downgraded CI’s debt in late April to its Baa3 rating – the last step before non-investment grade, known colloquially as “junk.” Moody’s cited CI’s “persistently high debt leverage no longer commensurate with its previous ratings level.” The agency pointed the finger at what it called “elevated” liabilities from CI’s acquisitions.
Mr. MacAlpine told analysts during a quarterly earnings call Friday that he is “very, very comfortable with the debt levels” at CI and is prioritizing share buybacks as he continues his plan to split apart the Canadian business and Corient. He said the priorities are to settle the remaining Corient obligations, which he said “are in the final stages of being fully met.” Corient’s goal, he said, is to “not rely on Canada’s cash flow as it relates to funding future acquisitions.”
“Canada’s cash flow,” he said, “will be singularly focused on share buybacks and debt reductions,” as they “would take precedence over deleveraging right now.”
“We believe the opportunity to buy our shares, given where we’re trading, is much more accretive for our shareholders than not buying shares,” he said. “We feel that that’s the best trade for shareholders that we have.”
CI spent $475-million on share buybacks in 2023, up from $230-million in 2022. The company has cut its shares outstanding by more than one-third since 2018, according to S&P Global Market Intelligence.
When CI buys a new wealth manager, it often makes deferred or “earn-out” payments as part of the deal. If the profits at the acquired businesses later meet certain targets, CI pays the previous owners of the firms more money.
CI must estimate the value of the contingent payments and record it as a liability until it’s paid out in cash. It estimated the amount at $486.6-million at March 31, slightly lower than the $493.4-million at the end of 2023. CI says it spent $570-million in cash in 2023 settling these types of liabilities.
As part of the April downgrade action, Moody’s said it now includes CI’s acquisition-related obligations in its debt numbers.
In the earnings call, analyst Tom MacKinnon asked if it was true that the contingent payments “have been largely funded by debt?”
CI’s chief financial officer Amit Muni responded, “Tom, cash is fungible, right?” and said CI uses its credit facility and cash flow for working capital needs.
CI estimates it will spend $106-million on contingent payments this quarter ending June 30, with the amounts dropping until the obligations are “fully satisfied” by January, 2025.
Ratings agencies have been downbeat on CI for some time.
CI asked Standard & Poor’s to stop rating it in May, 2023, after the agency downgraded it to junk status. Morningstar DBRS also rates CI, with a rating from June, 2023, that is two notches above junk. The agency plans to issue its latest rating for CI in June.
“We’ve been very vocal about the need for the company to start paying this debt and, less so, putting the funds toward dividends and share buybacks,” said Morningstar DBRS senior vice-president Nadja Dreff. “But obviously, it is the management’s decision on how they want to prioritize.”
Last year, in an attempt to begin to pay down the debt, the company sold a 20-per-cent stake in its U.S. wealth management business for $1.34-billion, telling investors they were pausing plans to take it public. The preferred shares the investors received had debt-like characteristics, and analysts pegged the effective interest rate on the financing at 14 per cent. The buyers of the preferred shares also have the right to force an initial public offering or sale of the U.S. wealth business within five years and nine months after the closing.
When asked by stock analysts how much of a priority it is for CI to maintain its investment grade, Mr. MacAlpine said that “will be a function of how the credit agencies view the deleveraging.”