December 3, 2023

CI Financial’s debt was downgraded to junk status by S&P Global Ratings after the Canadian asset manager asked S&P to stop rating its debt. The stock posted its biggest drop in nearly seven weeks.

S&P downgraded its issuer credit and senior unsecured debt ratings to BB+ from BBB- after CI asked to “withdraw our ratings,” according to a statement late Monday. It then gave up reporting to satisfy CI’s wishes.

The downgrade reflects growing concerns over CI’s more than C$4 billion ($2.9 billion) in debt, much of it to pay for the acquisition of the US-registered investment advisory firm. The Toronto-based company, one of Canada’s largest non-bank mutual fund sellers, has acquired dozens of wealth management offices in recent years, hoping to find new avenues for growth.

The strategy is the brainchild of CEO Kurt MacAlpine, who was hired in 2019 to lead CI in a new direction after years of pressure on CI’s core business from the growth of low-cost investment products.

The former McKinsey & Company consultant and WisdomTree executive also undertook a major restructuring of CI’s largest division, Canadian fund management. Revenue and adjusted earnings per share have risen, but high leverage has weighed on shares, which have lost about a third of their value since MacAlpine joined the company.

The ratings firm said the downgrade reflects S&P’s expectation that CI’s debt will be four to five times next year’s EBITDA. A CI spokesman did not respond to questions from Bloomberg on Tuesday. S&P did not respond to a request for comment.

CI shares were down 5 percent at C$12.72 as of 12:18 p.m. in Toronto, the stock’s biggest intraday drop since March 15 and the biggest drop among the 29 companies in the S&P/TSX financial index. The stock had fallen about 20% over the past year through Monday.

CI Financial has begun taking its U.S. wealth management business public, a key step in its plan to raise capital, reduce debt and split its Canadian and U.S. businesses. In its most recent conference call with investors in February, the company had not yet decided how many shares to sell or at what price. It also sold its minority stake in Boston-based Congress Wealth Management, saying it tripled its initial investment and would use cash to pay down debt.

CI still has investment-grade ratings from Moody’s Investors Service and DBRS Morningstar. As of March, the firm managed C$391 billion in client assets.

“Bond spreads jumped after another acquisition was announced in mid-March, pointing to heightened concerns about CI’s operating debt levels,” said Bloomberg Intelligence analyst Ethan Kaye. “Funding for subsequent transactions is likely to be more expensive and the downgrade echoes investor sentiment.”