In a warning sign about the pandemic rippling across wealth management, Moody's Investors Service changed the outlook for one of the industry’s most prominent firms to negative.
The $1.2 billion in debt issued by Aretec — the parent firm of independent broker-dealer network Cetera Financial Group — retained its earlier “B3” corporate rating denoting a high-risk issuer, Moody’s
The agency did, however, drop the firm’s outlook from “stable” to “negative” in its rating action.
Aretec’s new outlook “reflects a challenging macroeconomic environment which will weigh on the firm's revenue in the form of lower asset-based and advisory fees,” said Moody’s Assistant Vice President Fadi Abdel Massih in the report. “The negative outlook also reflects the elevated debt level and the increasing probability of deterioration in debt servicing capacity now that interest rates and market levels have declined.”
The Los Angeles-based firm of five IBDs with 8,000 financial advisors generated $1.88 billion in revenue in 2018,
Cetera spokeswoman Adriana Senior issued a statement about the Moody’s rating action: “We are pleased that Moody’s reaffirmed our rating and like all in the financial services sector right now, we understand their caution with the overall economic environment.”
Even before the coronavirus began spreading across the U.S., Moody’s had cited the high leverage of firms like Cetera, Advisor Group and Kestra Financial in judging their debt ratings following
Low interest rates and available capital helped make such mega-deals prudent investments for the PE firms, according to Carolyn Armitage, managing director of investment bank and consulting firm Echelon Partners.
It’s still “a little bit early” for firms like Cetera to take actions in light of the economic fallout expected from the coronavirus, Armitage says.
“The broker-dealer home offices would be sharpening their pencils to see — if this is protracted or deepens — where do we cut and how do we cut and who's impacted? And they do modeling of various potential expense savings that they could have,” Armitage says. “I’m hoping this is short-lived, but we don't know.”
She adds that Moody’s pronouncements could prompt competitors like LPL Financial to reference them with potential recruits and cause major concern at the corporate level at Cetera. Indie advisors who see their BD as a strategic business partner probably won’t see much impact, unless there are expense cuts that boost wait times for service, according to Armitage.
On the positive side for Cetera, Massih noted a “stabilizing financial advisor base and growth strategy focused on advisor recruiting.” The B3 rating at the corporate level, though, came from “weak profitability and debt servicing capacity, with elevated levels of debt,” he said.
The Fed’s March 15 decision
“Moody's expects the recent market volatility, combined with lower short-term interest rates, to halt and reverse Aretec's path of organic deleveraging demonstrated last year, a credit negative,” Massih said.
Reducing the leverage to below 6.5x, major expansion of revenue streams and strong advisor recruiting or retention could lead Moody’s to upgrade Aretec’s credit rating.
Significant advisor losses, smaller revenue without offsetting expense cuts, and an increase in leverage above 7.5x could prompt a downgrade by the rating agency.
The action on Cetera’s parent comes only months after Moody’s
Moody’s confirmed Advisor Group Holdings’ rating because of “the scale benefits that it will derive from the acquisition, which offset the credit risks from delayed deleveraging and the acquisition integration,” Massih said at the time.
Cetera’s adjusted debt-to-EBITDA ratio had
The latest action from Moody’s displays the potential future effects of the coronavirus pandemic throughout the industry, according to Armitage.
“This may be more enduring than initially thought,” she says. “I hate to admit that. I prefer to be optimistic, but this may have more far-reaching implications than we'd all like to admit.”
