Desjardins-Laurentian Financial Corporation: Under Review with Developing Implications

Kent Wideman, CFA, Jarmo Saari, CFA / 416-593-5577 ext.2235, ext.2257 / e-mail: kwideman@dbrs.com

 

n – Denotes that the security is non-cumulative.

 

Following the announcement that Desjardins-Laurentian Financial Corporation ("DLFC") is purchasing two property and casualty subsidiaries of Canadian Imperial Bank of Commerce for $330 million, DBRS is placing the Class A Preferred Shares of DLFC "Under Review with Developing Implications". This acquisition has the potential to be very strategically significant by not only extending DLFC’s size in the P&C area, but also adding a significant piece of business outside of Quebec. However, achieving profitability targets will not occur quickly, and the purchase will increase both debt and goodwill levels at DLFC. Following the 1997 sale of Laurentian Bank, DLFC has had excess cash to reinvest and has been seeking acquisition opportunities that are appropriate in terms of both fit and price.

 

With over $300 million of annual premiums, the CIBC subsidiaries (The Personal Insurance Company of Canada and CIBC General Insurance Company Limited) represent approximately 60% of the P&C premium base that DLFC presently has in Quebec (over $500 million). While the acquired entities are expected to remain independent from DLFC’s Quebec based operations, the acquisition would create a more meaningful base versus peer companies, placing DLFC in the top 10 Canadian P&C companies, based on combined premiums. Presently, DLFC’s only business outside of Quebec is Imperial Life, which is struggling and has a somewhat unclear future.

 

Our review will consider the plans that DLFC has with respect to operating these business lines, achieving profitability expectations and dealing with client and staff retention issues. Funding will also be key. Allowing for cash sources that DLFC expects to use (including $90 million of cash and excess cash from operating subsidiaries), the Company expects that new debt funding will be in the $150 million range. This would increase DLFC’s net debt ratio to approximately 15%. Depending on earnings and cash flow expectations, we do not expect that this will be an unmanageable level, but the additional debt would reduce cash flow and interest coverage ratios and add significant liabilities above the rated preferred shares, while the balance sheet will also be impacted by approximately $110 million in new goodwill. Subject to regulatory approval, the transaction is expected to close in October 2000.