Advisor Group and Cetera outlooks revised by Moody’s to stable

Bond-rating company Moody’s Buyers Providers modified its outlook for the debt of two of the most important wealth administration corporations, however famous uncertainties of their companies that might trigger ripples.

After Moody’s affirmed “B3” company rankings for the guardian corporations of Advisor Group and Cetera Financial Group and revised their outlook from “unfavourable” on Jan. 14, the corporations issued statements on what they characterised as an “improve.” However though their outlooks have brightened, the analysts cited each corporations’ debt ranges as a possible concern.

Giant wealth managers usually tackle billions of {dollars} in debt, and executives of the 2 corporations expressed no alarm after company warnings in regards to the impression of low rates of interest amid the primary coronavirus outbreak in March. Nonetheless, rankings analysts notice that the 2 personal equity-backed corporations are carrying a lot greater leverage than publicly traded friends in a extremely aggressive sector.

LPL Monetary additionally as soon as had excessive ratios of gross debt to EBITDA below its then-PE house owners, says Shampa Bhattacharya, a director of Fitch Rankings’ monetary establishments group. “Because the corporations acquire scale and mature, their purpose is to most likely look extra like LPL on this area,” she says.

Fitch — which doesn’t cowl Cetera guardian entity Aretec — downgraded Advisor Group Holdings’ to “B-” in March and affirmed its grade and unfavourable outlook in November. After the agency’s $1.3-billion acquisition of Ladenburg Thalmann and the lowered rates of interest, the agency’s adjusted leverage rose to six.7x by June 30 after beginning out 2020 at 6.1x, in accordance with Fitch.

“It is primarily as much as enchancment within the earnings and realizing synergies,” says Evgeny Konovalov, one other director of the company’s monetary establishments group who notes Advisor Group’s “slightly long-term” debt maturity. “What’s been influencing them shouldn’t be solely the acquisition-driven extra leverage but in addition the decrease cash-sweep revenue affecting the business.”

Moody’s didn’t make any analysts out there for an interview, although the company offered three stories it launched final month about Advisor Group and Cetera. Reverence Capital Companions-owned Advisor Group has greater than $2.7 billion in debt, whereas Genstar Capital-backed Cetera owes greater than $1.2 billion, in accordance with Moody’s.

The corporations “acted rapidly and successfully to regulate their companies to the market disruptions, rate of interest cuts and different operational challenges of the coronavirus pandemic,” Moody’s analyst Fadi Abdel Massih wrote in a Jan. 19 report. “Administration at each these impartial dealer sellers swiftly lowered bills, raised efficiencies and tailored their operations to a brand new distant work setting.”

Massih’s studying contrasts barely with the final motion on Advisor Group’s debt by Fitch a few months earlier. Whereas Konovalov and Bhattacharya praised the agency’s skilled management and famous an “bettering market place,” in addition they questioned whether or not it might “obtain deliberate value reductions” sufficiently to deleverage after the Ladenburg deal.

“The rankings are constrained by excessive leverage ranges, weak curiosity protection, low margins and aggressive dynamics throughout the impartial wealth administration sector,” the analysts wrote. “Further ranking constraints embrace the comparatively excessive reliance on transactional revenues and Advisor Group’s personal fairness possession, which introduces a level of uncertainty over the corporate’s future monetary insurance policies and a possible for extra opportunistic development methods.”

As well as, statistics in different stories on the 2 corporations that Moody’s launched in January confirmed different potential causes for warning in regards to the corporations’ non-investment grade debt. Advisor Group spends about $180 million annually on debt service funds — which is greater than the annual income generated by lots of the agency’s midsize opponents.

Moreover, regardless that Massih cited the corporations’ retention of advisors as strengths, the Moody’s analysts noticed a credit score problem looming of their dependence on recruiting. Within the third quarter, Cetera’s headcount dropped by a web 47 advisors to 7,543 in comparison with the earlier quarter, in accordance with Moody’s.

Cetera’s steady outlook “displays our expectation that the agency’s attentive and granular administration of its money flows in 2020 will assist it in accelerating its restoration from the challenges of the coronavirus pandemic,” Massih wrote within the Jan. 22 report. It additionally stems from a “stabilizing monetary advisor base” and a “swift concentrate on cost-cutting and bettering efficiencies as a response to pandemic-driven disruptions,” in accordance with the Moody’s report.

Advisor Group’s steady outlook signifies the analysts’ anticipation “that the agency’s expense administration, substantial synergy advantages from the acquisition and strengthened consumer asset ranges will maintain the agency’s credit score profile throughout 2021,” Massih wrote within the different Jan. 22 report.

The 2 corporations are close to the highest amongst impartial broker-dealers when it comes to their annual income, in accordance with Monetary Planning’s annual IBD Elite survey. Phoenix-based Advisor Group ($3.63 billion) is No. 3, and Los Angeles-based Cetera ($1.92 billion) is No. 5.

“Our firm’s robust monetary well being, which mirrored a big improve in money reserves throughout 2020, is guided by stewardship to our monetary professionals, staff and stakeholders,” Cetera CFO Jeff Buchheister mentioned in an announcement. The agency’s capital construction allows it to “keep accountable ranges of capital deployment, even throughout instances of uncertainty,” he added.

Moody’s revision of Advisor Group’s outlook speaks to “the power of our capital construction, our important ranges of money, the low charges on our variable debt and the truth that we’re properly forward of plan on the mixing of our Ladenburg Thalmann acquisition, which has exceeded advisor retention and monetary expectations,” CEO Jamie Value mentioned in an announcement.

Advisor Group’s representatives additionally emailed statements from Larry Roth, a former CEO of each corporations who’s now an industry consultant. Advisor Group is in “robust form,” in accordance with Roth.

“One of many single greatest canards that sure business watchers discuss up with personal equity-owned corporations is the idea that dimension of debt alone determines an organization’s future prospects,” Roth mentioned.

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