Advisor Group acquisition financed by debt rated ‘junk’ by S&P

The $1.6 billion in debt issued to finance the recent acquisition of Advisor Group has been rated below investment grade — commonly known as junk bonds — in a report this month by S&P Global Ratings.

Reverence Capital Partners, a private equity shop, completed its acqusition of 75% of the broker-dealer network from Lightyear Capital, PSP investors and others earlier this month.

Advisor Group is a network of four broker-dealers with more than 7,000 financial advisers with $272 billion in client assets. The network produced $1.7 billion in total revenue in 2018.

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Financial terms of the deal were not disclosed, but market sources had privately pegged the price tag for Advisor Group at close to $2.3 billion.

S&P slapped a rating of B+/Negative on Advisor Group’s debt.

S&P expects Advisor Group’s total debt service payments over the next year to be about $150 million. That could pose a problem for the bonds, particularly if interest rates decline, S&P noted.

“Our ratings on Advisor Group are based on its aggressive financial management, including high levels of debt and negative tangible equity, and reduced debt-service coverage,” according to the report, which was dated August 12.

“Even assuming the firm realizes all of its expected earnings improvements, [earnings before interest, taxes, depreciation and amortization] to total debt service would be only about 2x,” according to the report. “We believe such low debt-service coverage, in an industry whose results are correlated with volatile market conditions, leaves the firm’s debt-service capacity exposed.

“For instance, the firm’s cash sweep fees, which were about 23.5% of net revenues in the first quarter of 2019, will be negatively affected by the Federal Reserve’s decision to lower interest rates in July. Should the Fed continue to lower rates or should Advisor Group suffer any operational setbacks, lower-than-anticipated earnings could threaten the firm’s debt-service capacity.”

But it’s not all bad news for Advisor Group, according to the S&P. Its earnings have been boosted by several recent acquisitions, including Questar, Signator and Capital One’s adviser business, for example.

“The firm has a high level of recurring revenue, limited credit and market risk, and adequate liquidity,” the report said.

A spokesman for Reverence Capital, Michael Flaherty, declined to comment.

In an email to InvestmentNews, Jamie Price, the CEO of Advisor Group, said that, despite uncertainties about the interest rate environment, major ratings agencies have provided ratings and research that look at the network’s earnings across market cycles, its scale, and those factors that drive cash flows.

“Reflecting the confidence of institutional investors in Advisor Group’s capital structure, our bonds have been trading up in the secondary markets,” Mr. Price wrote.

Advisor Group is not the only independent broker-dealer network to be faced with junk rating for its debt. Last year, Moody’s Investors Service slapped a long-term rating of B3, which is also considered junk level, on the $1 billion of debt used to finance the acquisition of Cetera Financial Group by Genstar Capital. At the time, Moody’s cited a high debt to EBITDA level as a key reason for its rating.