Tuesday, April 18, 2006

DBRS Upgrades Ratings for Power Corp & Power Financial

Investment Executive, James Langton, 18 April 2006

Dominion Bond Rating Service is upgrading the ratings of Power Financial Corp. and its parent company, Power Corp. It says it expects the Power companies to remain active financial industry consolidators.

The financial strength of Power Financial is primarily derived from its controlling investments in two of Canada’s leading financial service providers: Great-West Lifeco Inc. and IGM Financial Inc., DBRS explained.

The ratings agency noted that both firms have been playing active roles in the consolidation of the financial services industry in recent years, with strategic direction and financial support provided by Power Financial. “The two major subsidiaries performed well with earnings per share growth of 11% in 2005; both have also recently been upgraded by DBRS,” it said.

The company’s remaining major investment, a net 27% equity interest in Pargesa Holding SA, a Geneva-based holding company, represents about 8% of the company’s net asset value. Pargesa indirectly owns non-financial service investments in Europe (oil & gas and chemicals; specialty materials and cement; entertainment & media; and energy, water, and waste services). “[It] provides a modest strategic advantage in the form of geographic and industry diversification,” DBRS said.

During 2005, Power Financial reported a 10.1% increase in operating earnings and a 16.7% increase in dividends received, the rating agency reports. “The company’s capitalization is conservative, especially when the market value and the diversification of its earnings and its asset portfolio are considered. Liquidity is adequate, enhanced by good capital market access for the company and its subsidiaries.”

“DBRS believes that Power Financial intends to play a prominent role in the further consolidation of the financial services industry. This intention raises the possibility of acquisition-related event risk. However, recent successful value-added acquisitions support the company’s reputation for strategic vision and excellent execution,” the ratings agency said.

The credit strength of Power Corp. is tied directly to its 66.4% equity interest in Power Financial, which represents over 90% of operating revenue, operating cash flow, and the net asset value of the company. The upgrade on its ratings relates directly to upgrade of Power Financial.

“With over $670 million of cash on hand, and strong discretionary cash flow driven by dividends received from Power Financial, the company is well-positioned to add to its investment portfolio or to retire shares. DBRS believes that any new investments will remain conservative, consistent with long-term strategies, and prudently financed,” DBRS said. “Succession issues are always a concern at closely held companies but Power Corp. has demonstrated a tradition of successful senior management transition and continuity.”