Advisor Group, Cetera get boost to credit outlook

Moody's Investors Service this month gave a shot in the arm to the parents of Advisor Group and Cetera Financial Group when it raised credit outlooks for both firms from negative to stable.

Advisor Group Holdings and Aretec Group Inc. have faced questions in the market about their debt loads. Last March, when the market was whipsawed by the economic shutdown caused by COVID-19 and the Federal Reserve's action to cut interest rates, Moody's downgraded the outlook for Aretec, Cetera spelled backwards, from stable to negative. At the time, it had a negative outlook for Advisor Group.

Advisor Group is home to 10,500 reps and advisers and Cetera has about 7,500 under its roof.

Both large broker-dealer networks relied heavily on debt to fuel acquisitions, raising questions about how they would weather the turbulent markets of 2020. Lower interest rates cause pain for all broker-dealers, who generate income from interest generated from client cash and borrowing.

Moody's cited the work by both broker-dealer networks' senior executives as one of the reasons for the improved outlooks. Both, however, have corporate bond ratings of B3, which stands for non-investment grade of junk bonds.

"Advisor Group Holdings Inc's ratings reflect the firm's successful navigation of the challenges presented by the coronavirus pandemic, equities markets volatility and sharp decline in short-term interest rates in early 2020," according to the report, which was published January 22. "Advisor Group’s seasoned management team swiftly lowered expenses, raised efficiencies and adapted the firm’s operations to a new remote work environment. In addition, Advisor Group was able to accelerate its integration of its Ladenburg Thalmann acquisition, realizing a large portion of its forecasted expense synergies ahead of schedule."

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"Aretec's strong management team swiftly lowered expenses, accelerated some of its projects with focus on efficiencies and adapted the firm's operations to a new remote work environment," according to Moody's. "These credit positive actions demonstrate the company's ability to adapt and put Aretec in a stronger position to benefit from improving operating conditions and a strong, broad-based rise in equities markets."

Credit outlook challenges remain for both, according to the reports. Those include high leverage pressuring earnings and profitability and business models with growth dependent on ability to recruit and retain financial advisers.

Executives from both networks said the improved credit outlook from Moody's was reflective of their strengths.

“We’re pleased with Moody’s upgrade of our credit ratings, reflecting the strength of our capital structure, our significant levels of cash, the low rates on our variable debt and the fact that we are well ahead of plan on the integration of our Ladenburg Thalmann acquisition, which has exceeded adviser retention and financial expectations,” according to Advisor Group CEO Jamie Price.

“The strength and flexibility of our financial model and underlying capital structure is designed to support the long terms aspirations of our organization enabling us to maintain responsible levels of capital deployment, even during times of uncertainty,” Jeff Buchheister, chief financial officer of Cetera, wrote in a statement.