Advisor Group announced plans last week to issue $475 million in senior secured notes to help fund its acquisitions of American Portfolios Financial Services and Infinex Financial Holdings, a broker/dealer that supports community-based banks and credit unions.
“We are raising the funds in advance of closing both acquisitions,” said Jon Frojen, chief financial officer at Advisor Group, in an email. “We’re pleased that the offering was very successful in what has been a challenging market for issuers.”
According to a BofA Securities document obtained by WealthManagement.com, the final offering was for $500 million in notes at an interest rate of 8.625%, due in 2027. BofA, the lead bookrunner, recommended Advisor Group launch the offering “before the typical market slowdown heading into Labor Day.”
In response, Moody’s assigned a B2 rating to the notes and changed its outlook on the company from stable to positive. The ratings agency cited the credit benefits of both acquisitions, with Infinex providing a dedicated channel for advisors in the financial institutions market and American Portfolios growing Advisor Group’s total client assets.
“Advisor Group has a strong track record of successful acquisitions, as evidenced by timely integrations and effective realization of synergies,” Moody’s said. “The company has identified substantial synergies associated with both acquisitions related to vendor and strategic partner contract alignments. Given the readily identifiable nature of these synergies as well as the company's strong track record, Moody's expects the bulk of these to be realized by the end of 2023.”
Moody’s also affirmed Advisor Group’s other ratings, citing its growth in client assets, revenue and shift toward advisory-based business. The broker/dealer network is also “strongly positioned to benefit from interest rate increases,” which will positively impact its revenue and profitability, the ratings agency said.
“Interest revenue generally accretes substantially to the firm's bottom-line because of the rate-insensitivity of client cash balances,” Moody’s said.
Advisor Group’s trailing 12-months debt to EBITDA ratio (on a Moody’s adjusted basis) was at about 7x as of the end of 2021, down from 10.5x at the end of 2020. Moody’s expect it to reach 6.5x to 7x by the end of 2022.
That said, Moody’s indicated that its ratings also reflected the company’s “weak (albeit improving) pretax earnings, sensitivity to interest rates and other macroeconomic variables, and its ownership by a financial sponsor which could result in aggressive financial management actions over time such as further increases in debt leverage.” In 2019, Advisor Group sold a 75% stake to Reverence Capital Partners, a private equity firm run by former Goldman Sachs banker Milton Berlinski.
S&P Global Ratings assigned a ‘B-’ rating to the notes, one notch down from Moody’s rating, and said it expects the market declines to put pressure on the firm’s asset-based revenue.
Even if the company’s debt is upgraded, they will still be non-investment grade, said Jonathan Henschen, founder of the recruiting firm Henschen & Associates in Marine on St. Croix, Minn.
“These are still speculative bonds, and any sort of major market correction could ruin their plans, with possible further downgrades,” Henschen said. “When you have a market-sensitive industry like a broker/dealer, it could greatly cut into their cash flow and that can cause all new problems.”
Henschen expects Advisor Group to use the proceeds to pay out retention bonuses to the reps. He says some reps with around $250,000 in production have been offered 15%, while larger producers with $1 million or more in revenue are getting 20%. And while retention bonuses are typically based on three-year terms, these are seven-year notes, which he says is “excessive.”
“Out of respect, we don’t publicly discuss advisor compensation details,” Frojen said. “What we can say is that Advisor Group’s offers highly competitive compensation to advisors at each stage of the professional life cycle with us, from initial recruitment onwards.”