Who dares to bring bad news to the men who run CI Financial?

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I’m beginning to think the leaders of CI Financial Inc. CIX-T don’t react well to bad news.

Not from S&P Global Ratings, which downgraded CI Financial’s debt to junk status in May, 2023, and promptly found out CI no longer cared to be evaluated by the agency, thank you.

Nor by Morningstar DBRS, another major ratings agency that CI kiboshed last week. CI said it would no longer work with the agency because Morningstar DBRS wanted to stick to conventional measures of profit and wouldn’t base its ratings on CI’s custom metrics. CI says Morningstar DBRS’s methods cause double-digit swings in its debt-to-earnings over short time periods.

Morningstar DBRS, in a lovely show of spunk, said it would continue to rate CI’s debt whether CI paid it to or not.

Occasionally, a company gets into a spat with a debt-ratings agency and decides to opt out. It’s much more unusual for a company to do it to two different agencies in a little more than a year.

It seems there’s just no room in CI’s world for the folks who don’t believe in the big-time plans of chief executive officer Kurt MacAlpine and chairman Bill Holland, the former CEO who hired Mr. MacAlpine in 2019.

Under Mr. MacAlpine, as The Globe and Mail has chronicled, CI has gone on a multibillion-dollar buying spree of U.S. wealth managers. Mr. MacAlpine has said CI has “paid a fair price” for the firms it acquired. The CEO of competitor Focus Financial Partners Inc., explaining why it, too, wasn’t making deals, suggested other companies in the industry had been spending like “drunken sailors” on their acquisitions.

In executing this plan, CI has taken on a big chunk of debt. The obligations peaked at nearly $4.2-billion in early 2023, and checked in at $3.8-billion at June 30, the date of CI’s most recent publicly released balance sheet. (In 2023, CI announced an outside “investment” into its U.S. business by some private players, but many analysts view it as debt, so the analysts added another $1.6-billion to CI’s debt in their models in the most recent quarter. That would push the total to $5.4-billion.)

There are a couple of things that bother the folks who analyze CI’s balance sheet. One is that CI hasn’t shown a keen interest in reducing that debt. Instead, it’s been using cash to buy back shares. Mr. MacAlpine said in May, citing CI’s stock price at the time, that repurchases are “the best trade for shareholders that we have.”

The other is that the debt CI has taken on is high, relative to the profits it needs to pay it back. And this is where CI has come to loggerheads with Morningstar DBRS. (Morningstar DBRS declined to comment on the CI matter other than to acknowledge the two had parted ways.)

There are many measures of profit. A company’s net income, known colloquially as the bottom line, should be calculated according to accounting principles, in this case, International Financial Reporting Standards.

Many companies – and analysts, including S&P and DBRS Morningstar – prefer EBITDA. That measure, earnings before interest, taxes, depreciation and amortization, excludes two big accounting entries that are non-cash. The result, EBITDA enthusiasts say, gives an estimate of the cash a company generates from its operating business, regardless of its tax bill and the capital choices management has made.

Then, there’s “adjusted EBITDA,” a tool that nearly every management team uses, saying it better reflects the true performance of its business. It’s almost always higher than EBITDA. At CI, it’s often a great deal higher than EBITDA.

In the June 30 quarter, CI removed 11 different line items – expenses or gains – that go into EBITDA to arrive at its adjusted figure. Most relate to its acquisition strategy, which means they’re not unusual or special; they’ve been part of the CI income statement every quarter for several years now.

In its management discussion and analysis, CI says these adjustments give investors a consistent way to analyze the company’s financial performance and business trends and compare it with other wealth-management companies. (CI did not reply to a request for comment for this column.)

As CI Financial tops $500-billion in assets, investors’ worries ease

Since the fourth quarter of 2020, when CI’s adjustments first became meaningful, adjusted EBITDA has been higher than EBITDA 13 out of 15 quarters. It’s been $100-million higher in seven quarters. (In two recent quarters – the fourth of 2023 and the first quarter of this year – CI reported EBITDA of $39.8-million total. Adjusted EBITDA, however, totalled $567.6-million in the two quarters.)

And let’s remember that if a company suggests investors look at their adjusted EBITDA, they’re also suggesting turning away from good old IFRS net income. In the past 15 quarters, CI has reported $848.6-million in net income, or about $56-million a quarter. Adjusted EBITDA came in at $3.9-billion, or about $260-million a quarter.

This good-news measure helps CI’s leadership sell its story. It may be working, as its shares are hitting 52-week highs.

It’s worth us on the outside asking, though, if CI’s leaders are getting an honest evaluation of the company from those inside. Would a CI employee dare bring Mr. Holland and Mr. MacAlpine any bad news, since we can see they react so poorly when the ratings agencies do it?