CI Financial will cut off U.S. RIA unit from Canadian cash infusions as part of 2023 IPO but with a giant parting gift -- total forgiveness of its substantial mountain of debt

CI Financial's RIA unit in the United States has been buying firms with its Canadian parent's cash like it'll never have to pay it back -- growing from zero to $126 billion of AUM in less than two years. See: A hotshot Canadian CEO tears through the RIA market like the polar vortex, sweeping up $16 billion in AUM and ringing the bell on an NYSE listing that could fuel even more deals

It turns out the 2020-founded firm, in fact, mostly won't.

CI Financial CEO Kurt MacAlpine assured analysts that the big RIA will start life with no responsibility for any of the company's $2.7 billion of net debt outstanding.

“The Canadian business will retain the existing debt, which includes the deferred acquisition payments,” he said.

“Launching our U.S. business debt-free provides us with a unique strategic advantage and maximizes our ability to continue to build on our industry-leading growth, scale, and margin,” he added.

CI promises to submit its S-1 paperwork to the Securities and Exchange Commission (SEC) by Nov. 30 for a 2023 initial public offering destined for an unbelievable outcome -- a virtually debt-free balance sheet for its free-spending progeny. See: CI Financial's IPO could make the RIA M&A force next to unstoppable if it 'pops', but industry insiders see Focus Financial's stuck stock price as a 'tremendous headwind'

Precautionary moves

The Miami RIA unit -- originally hinting at selling a 20% stake of its 2020 startup -- will seek to unload far more equity on Wall Street to reflect reset priorities after a rough year.  See: Canada's CI Financial and Florida Gov. Ron DeSantis announce plan for Miami to become the $77-billion rollup's U.S. headquarters in 2023

"We are considering selling a larger portion of our ownership in our U.S. business,” Amit Muni, CI Financial Corp. chief financial officer, said to Wall Street analysts on Nov. 13th. 

"We intend to use the proceeds from the IPO to reduce our debt and leverage."

He added: “We amended our credit facility to a maximum net debt covenant of 4.5 [times]. The actual leverage per our credit facility definition was 3.7 [times]." 

“Going forward, our plan is to … deleverage to a target level of 1.5 to 2x and to effectively privatize our business.”

The Canadian unit will also appropriate the proceeds of the U.S. IPO to pay down its own mound of debt.

CI Financial will also de-list its tracking stock from the New York Stock Exchange.

The debt limit increase is more precautionary than reactive, says Matt Crow, president of Mercer Capital.

“They had a good quarter in a difficult environment. They probably bumped their debt covenant to 4.5 just to get some breathing room," he says. 

M&A opportunities

Though it's unknown how Wall Street will value the U.S. wealth unit, the IPO's proceeds likely won't wipe out its associated debt.

The clean slate for the U.S. unit is a grand IPO parting gift for the young subsidiary, yet it also signals the end of slush cash from its parent, said MacAlpine.

“Post-IPO, the Canadian business will not fund any future U.S. acquisitions, and that business will not be pursuing meaningful M&A opportunities,” he added on the call.

As for its own acquisition plans, "our appetite and interest in doing an M&A has always been a function of the quality and the availability of businesses that are ultimately coming to market," MacAlpine told analyst Geoffrey Kwan.

"So, we don't feel compelled to buy anything. Our success is not at all dependent on a need to buy anything to keep an engine going.

"We've demonstrated every single year we've been in the market that we have the leading inorganic growth when we apply it, and our organic growth rates are fantastic."

Slippery slope

Though the IPO market is weak right now, the company is pinning its hopes on a series of likely spin-offs – particularly Porsche's ejection to selfhood from Volkswagen.

If CI investors hope to drive Porsches from their investment, they will need to rely on the giant arbitrage of Canadian asset management assets into U.S.-based wealth assets-- something MacAlpine expects because of the stickiness and high margin nature of such investments.

"When you're the wealth manager and you own the entirety of that client relationship, you're not like whether we redeem someone's mutual fund and buy somebody else's, or redeem a mutual fund and move the cash or something shorter duration; we keep all of those assets," he says. "So our retention in our wealth businesses is north of 99%."

What has been slippery for CI is its share price. 

A year ago, it's shares closed on the New York Sock Exchange at $23.62 but closed today at $11.01.

The company now has a market capitalization of just $2 billion -- for both the Canadian and U.S. units.

Yet the tail of debt ratios is not wagging the dog of equity raises by expanded IPO, MacAlpine ensured on the call.

"When we announced our intention to IPO we said initially, or currently, 20%," he said. 

"The 20% was a reflection of ensuring the business was set up well for success recognizing typical size at an IPO, our ability for index inclusion [and] getting enough scale in the market for it to be liquid in trade well.

"But there was never a stated intention of sitting on an 80% stake forever."

Weathering the storm

On the financial front, MacAlpine said the company was able to execute well "amidst the volatile and uncertain market environment. 

Adjusted EPS of $0.73 (Canadian $) a share reflected lower revenues as a result of pressure on our average assets driven by market decline, which masked strong net flows across all business lines, he explained.

EBITDA per share was essentially unchanged from a year ago, reflecting the transformation of the business and sizable contributions from wealth management, which represented nearly 30% of adjusted EBITDA.

Capital deployment in the quarter was focused on completing previously announced M&A obligations as well as buybacks to take advantage of the market dislocation in our shares.

"Our net leverage, excluding the noise associated with unrealized currency movements, was flat. Our asset management business generated net inflows for the quarter," he said.

"Within Canadian retail, our $600 million (Canadian $) net flows stand out when compared to the billions of outflows incurred by the Canadian mutual fund industry. We saw the strongest demand for shorter-duration fixed-income funds, liquid alternative strategies, and a range of our EPS.

"The transformation of our investment management platform continues to deliver the best investment performance and net flows that we've seen in several years.

"Our wealth businesses continue to generate consistently positive inflows despite market volatility with both our Canadian and U.S. wealth businesses continuing to produce positive organic growth in the third quarter.

"This success illustrates the strength of our differentiated businesses, both north, and south of the border.

"We also continue to execute against our three strategic priorities to modernize asset management, expand wealth management and globalize the company."