In the wake of the announcement that Advisor Group is buying a large bank-focused broker-dealer, Fitch Ratings on Thursday affirmed the broker-dealer network's issuer rating of debt at B-, meaning "highly speculative" — commonly referred to as junk.
Fitch also reaffirmed the rating outlook for Advisor Group's debt as stable.
On May 19, Advisor Group announced that it had agreed to buy Infinex Investments Inc., with 750 financial advisers who manage more than $30 billion in client assets.
"The report confirms the success to date of our focus on utilizing our industry-leading size, scale and financial strength to continue reinvesting back into resources that support the growth of our financial advisers’ businesses, and our leadership position in the wealth management space," an Advisor Group spokesperson wrote in an email.
In 2019, Reverence Capital Partners, a private equity manager, completed its acquisition of 75% of the Advisor Group broker-dealer network from Lightyear Capital, PSP Investors and others. At the time, the $1.6 billion in debt issued to finance the acquisition of Advisor Group was rated below investment grade in a report by S&P Global Ratings.
A year later, Advisor Group finished its acquisition of Ladenburg Thalmann Financial Services Inc., creating a behemoth organization, with 9,700 financial advisers under the roofs of half-a-dozen broker-dealers before it closes the Infinex acquisition.
Fitch Ratings said in its note that the Infinex transaction will not materially alter Advisor Group's leverage, as measured by gross debt to earnings before interest, taxes, depreciation and amortization, a common metric, which was at 6X, or six times.
Fitch Ratings noted that the rating affirmation also reflected Advisor Group's "improving scale as one of the largest independent financial advisers in the U.S.; cash-generative business model; a relatively flexible cost base; and high adviser retention rates."
On the downside, Fitch Ratings said Advisor Group's ratings were constrained "by relatively high leverage levels and weaker interest coverage, low margins and the highly competitive environment associated with the independent broker-dealer and registered investment advisor, or hybrid RIA, business model."
"Additional rating constraints include Advisor Group's private equity ownership, which introduces a degree of uncertainty over the company's future financial policies and a potential for more opportunistic growth strategies," according to Fitch Ratings.
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