Acquisition of Cetera being financed through $1 billion junk bond sale

Bonds given junk status by Moody's because of high debt level being taken on by Cetera's parent company

Aug 21, 2018 @ 3:58 pm

By Bruce Kelly

Genstar Capital plans to finance the majority of its acquisition of Cetera Financial Group through the sale of $1 billion worth of junk bonds.

According to a source close to investment bankers who did not want to be identified, the total price tag for Cetera is close to $1.7 billion. Private equity firm Genstar is kicking in $700 million of its own capital in the acquisition, according to the source. Aretec Group Inc., Cetera's parent company, will borrow the rest through the junk bond sale.

Cetera Financial Group, a network of six independent broker-dealers with about 8,000 brokers and advisers, said last month that Genstar Capital would buy a majority equity stake in the company. The deal is scheduled to close late this quarter.

Combined, the six firms produced $1.78 billion in total revenue last year, according to InvestmentNews data.

Moody's Investors Service slapped a long-term rating of B3 on the debt, which is considered junk level, citing a "high debt/EBITDA of around 7.5" times, according to a Moody's credit opinion report from last week. EBITDA stands for earnings before interest, taxes, depreciation and amortization.

In contrast, LPL Financial recently posted a net debt to EBITDA ratio of 2.3 times, said Matthew Audette, LPL's chief financial officer, during a conference call with analysts in July to discuss earnings.

"[Aretec's] increase in debt following the acquisition pressures its financial flexibility and limits its room for additional debt at the existing rating level," according to the Moody's report. "Moody's ratings also reflect a difficult operating and regulatory environment for independent broker-dealers requiring them to constantly invest in systems and processes to maintain their compliance," the report states.

Moody's also noted positive factors contributing to its rating, including "a stabilizing financial adviser base, favorable macroeconomics and market environment and growing client asset levels.

"Aretec's revenues stand to benefit from macroeconomic tailwinds, including a rising interest rate environment as well as strengthening levels of client assets driven by the overall favorable equity markets, but also stronger growth in net new assets," according to the report. "Aretec's retention of advisers has been stronger than expected, which will allow the firm to regain its revenue growth targets at a faster pace."

A spokesman for Genstar, Chris Tofalli, declined to comment for this story, as did a Cetera spokesman. "As noted in our press release announcing this strategic partnership, we are not publicly discussing financial terms," said the spokesman.

The history of Cetera is highly convoluted, including being spun off in 2010 from Dutch insurer ING Groep and acquired in 2014 by the former nontraded real estate investment trust czar Nicholas Schorsch. Cetera's former parent company, RCS Capital Corp., filed a prearranged Chapter 11 bankruptcy reorganization in 2016. Cetera Financial Group was then owned by RCS Capital's former first and second lien holders, including private-equity firms Fortress Investment Group and Carlyle Investment Management, as well as money manager Eaton Vance.

The six firms that make up Cetera's independent broker-dealer network are: Cetera Advisor Networks, Cetera Advisors, Cetera Financial Institutions, Cetera Financial Specialists, First Allied Securities and Summit Financial Services Group.

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