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S&P: Voya Deal Does Not Impact Cetera Credit Rating

Cetera's acquisition of Voya's financial planning channel is expected to moderately increase the firm’s leverage, but not enough to change S&P Global Ratings' credit outlook.

S&P Global Ratings said this week the acquisition of the independent financial planning channel of Voya Financial Advisors would have only a minimal impact on Cetera Financial Group's debt ratio and will strenghten the firm's market position. The debt rating agency said the deal would not impact the firm's B- credit rating for Aretec Group, the holding company for Cetera Financial Group. first reported that the deal was imminent over the weekend.

S&P said the deal is expected to moderately increase the firm’s pro forma leverage for 2020 to a range of 5.75x to 6.25x debt to EBITDA, up from the analysts’ previous expectation of 5.5x to 6x.  

“Despite the modest deterioration in leverage, we believe these metrics will be commensurate with our existing assessment and remain in line with our 'B-' issuer credit rating,” the analysts wrote. “The acquisition will strengthen Aretec's market position by adding scale and enhancing recurring revenue.”

"Cetera’s strong financial health, which reflected a significant increase in cash reserves during 2020, and was acknowledged by a recent Aretec outlook upgrade by Moody’s (more info here), is guided by stewardship to our financial professionals, employees and stakeholders," said a Cetera spokesman, in a statement. "Our capital structure was and continues to be architected in way that optimizes access to capital and the cost of capital with maximum operating flexibility. 

"We have for some time espoused the benefits of partnering with an organization like Genstar who for the second year in a row has been named in the top three performing private equity companies in the world by 2020 HEC-Dow Jones Private Equity Performance Ranking," the spokesperson said. "Our partnership affords us both access to capital and access to some of the smartest minds in the world, for which we are very grateful."

S&P says Cetera is now the fifth-largest independent broker/dealer in the country, with over $300 billion in client assets and more than 8,400 advisors. LPL, still the largest IBD, has more than 17,000. 

Voya and Cetera did not disclose details of the transaction, except to say that it will provide Voya with over $300 million in deployable proceeds.

Multiple sources in the private equity industry who have analyzed independent b/d valuations in the past 24 months noted that just before COVID-19 hit, when interest rates were higher, IBDs were selling at around 1x total annual revenues. Now, valuations remain on the higher end historically but have been subjected to downward pressure because of reduced projections from cash sweep revenues, which are linked to the interest rate environment. Valuations have dropped slightly to 0.5 to 0.7x total annual revenues.

In January, Moody’s Investors Service changed its rating outlook from negative to stable for both Aretec and Advisor Group, another private equity-backed competitor in the IBD space.

“The change in Aretec's outlook to stable from negative reflects Moody's expectation that the firm's attentive and granular management of its cash flows in 2020 will help it in accelerating its recovery from the challenges of the coronavirus pandemic,” Moody’s wrote. “The change in outlook also reflects Aretec's stabilizing financial advisor base and client assets levels and the firm's improving liquidity position which was the result of management swift focus on cost-cutting and improving efficiencies.”

Moody’s said both firms acted quickly to the market disruptions, interest rate cuts and operational challenges brought on by COVID-19; they lowered expenses and adapted quickly to a remote working environment.

Last March, Moody’s downgraded its outlook from stable to negative for Advisor Group and Cetera; Advisor Group’s debt was also downgraded.

Jonathan Henschen, president of the recruiting firm Henschen & Associates in Marine on St. Croix, said it made sense that the Voya transaction wouldn’t impact Cetera’s debt rating, when you compare it to Advisor Group’s acquisition of Ladenburg Thalmann one year ago, in Feb. 2020, with roughly 4,700 advisors.

“Proportionally, not as big an acquisition, less chance of being downgraded over it,” he said.

In addition, when Advisor Group purchased Ladenburg, those bonds were rated significantly less than the firm’s existing debt. In November, Fitch Ratings assigned a CCC/RR6 rating to the $244 million of senior unsecured notes assumed by Advisor Group from Ladenburg Thalmann. Meanwhile, Advisor Group’s long-term issuer default rating is at B-. Fitch also affirmed its negative outlook on the firm.

“The negative outlook also reflects uncertainties surrounding Advisor Group's ability to achieve planned cost reductions associated with the acquisition of Ladenburg and the extent to which realized synergies would be sufficient to drive deleveraging,” Fitch said.

Henschen believes the ratings agencies may assign a lower rating to Cetera’s bonds issued to purchase Voya.

“They’re not going to downgrade the debt they currently have, but the debt on the bonds for purchasing Voya may very well have a lower rating than the current debt has.”

A spokeswoman for Cetera did not return a request for comment by press time. 

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