Press Release

DBRS Morningstar Comments on the Proposed Reorganization of Power Corporation of Canada and Power Financial Corporation

Insurance Organizations
December 13, 2019

DBRS Limited (DBRS Morningstar) notes that on December 13, 2019, Power Corporation of Canada (POW; rated “A” with Stable trend by DBRS Morningstar) announced a reorganization proposal for Power Financial Corporation’s (PWF; rated A (high) with Stable trend by DBRS Morningstar) shareholders, which effectively eliminates the dual-holding company structure, resulting in approximately $50 million in cost reductions within two years. Furthermore, POW and PWF announced their intention to redeem an aggregate of $350 million in preferred shares, reducing net financing costs by approximately $15 million per year on a pre-tax basis.

The proposed transaction is for PWF minority shareholders to receive 1.05 POW Subordinated Voting Shares and nominal cash consideration for each PWF Common Share held. Following the reorganization, PWF shareholders would gain exposure to the broader portfolio of POW’s businesses. In addition to currently holding a 64.1% interest in PWF, POW has other significant investments: Power Energy Corporation, Sagard Investment Funds, and China Asset Management Co. Ltd., which provide additional revenue diversification. In turn, PWF holds investments in Great-West Lifeco Inc. (rated A (high) with Stable trend by DBRS Morningstar), IGM Financial Inc. (rated A (high) with Stable trend by DBRS Morningstar), Pargesa Holding S.A., and the Portag3 Funds. Moreover, Pansolo Holding Inc. intends to purchase 5 million to 6 million participating preferred shares of POW in accordance to the Pre-Emptive Right, resulting in a continued majority shareholding by the Desmarais family following the reorganization.

These developments are favourable for the credit profile of both POW and PWF as the reorganization will allow for a simpler and less expensive corporate structure. Specifically, the proposed reorganization will result in the intermediate holding company, PWF, becoming delisted and being wholly owned by POW. Additionally, the appointment of Jeffrey Orr (PWF’s current chief executive officer (CEO)), as the next CEO of POW, will provide continuity to POW’s strategic management, a positive given his long-standing tenure with the organization.

While the announced preferred share redemption will decrease the cash held at POW and PWF, the companies will continue to benefit from significant cash balances and other liquid assets. The decline in cash is offset by lower annual preferred dividend payments and operating costs resulting in a pro forma fixed charge coverage for POW of 16.0 times (x) and PWF of 16.3x, an improvement from 14.2x and 15.0x as at Q3 2019, respectively. The redemption of preferred shares and issuance of new Subordinated Voting Shares will also result in improved financial leverage for both companies, with a decrease to 7.1% from 11.1% for POW and 14.2% from 15.1% for PWF. This improves capitalization assessments for both companies. Other than the redemption of preferred shares, large cash outlays are not expected in the foreseeable future as the earliest debt maturity is in 2033 for PWF and 2039 for POW. These actions are viewed as management’s effective cash utilization during a calmer period for the organization and reflects the strong credit profile of the companies.

The proposed reorganization is subject to the approval of at least half of the votes cast by PWF minority shareholders.

Notes:
All figures are in Canadian dollars unless otherwise noted.

For more information on this credit or on this industry, visit www.dbrs.com.

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