Moody’s Ratings and S&P Global Ratings recently issued negative outlooks on RIA aggregator Focus Financial Partners and Edelman Financial Engines, an RIA with $284 billion in assets under management.
Moody’s recently affirmed Focus’s B1 corporate family rating, senior secured bank credit facility ratings and its B1-PD probability of default rating. But analysts changed their outlook on the ratings from stable to negative, citing Focus’s recent move to consolidate its 90 partner firms into a few “hub” firms.
“While Focus's new strategic initiative to establish controlled wealth management firms is a meaningful shift from its original business model, it aims at addressing the company's weak profitability, as measured by Moody's, relative to peers,” Moody’s writes.
Focus, which was taken private in a sale to Clayton, Dubilier & Rice last year, recently combined two of its largest partner firms, Buckingham Strategic Wealth and The Colony Group, to create a $50.2 billion RIA. Focus has already bought out the management teams of seven of its 90 partner firms, according to Moody’s.
“The management agreement buyouts are typically structured with a combination of cash and equity that aligns the interests of Focus and the selling principals,” Moody’s writes. “However, additional future cash payments, which Moody's includes in Focus's adjusted debt, may be paid to the sellers upon achieving certain growth metrics.
Focus’s debt-to-EBITDA ratio was 6.1 times as of the end of 2023, up from 5.1 times in 2022. It is now above Moody’s expectations for B1-rated companies.
“Because the transactions are expensed according to GAAP and the timing of synergies is uncertain, Moody's does not expect meaningful improvement to Focus's profitability, as measured by Moody's, over the outlook period,” Moody’s writes. “That said, adjusted EBITDA margins, under the new business model, are expected to expand over the next several quarters.”
A spokesman for Focus did not return a request for comment prior to publication.
Edelman Financial Engines recently proposed a new $575 million second-lien term loan due October 2028 to refinance the firm’s existing second-lien term loan due in July 2026. S&P Global Ratings assigned it a CCC+ debt rating, which is in junk bond territory.
Moody’s assigned a Caa2 rating to the term loan, one notch lower than S&P’s rating, calling it a “leverage-neutral transaction.” It also assigned a B2 rating to the firm’s proposed 2028-backed senior secured revolving credit facility, which replaces the current credit facility. Both ratings are in junk territory.
The rating agency points to a strong 2023 for Edelman, citing stronger equity markets, good cost control and lower marketing spending as the firm transitioned from “high-cost radio marketing to low-cost digital marketing.” Moody’s also points to the firm’s success in converting workplace (employee planning) clients into wealth planning clients.
“The stable outlook reflects Moody's view that the consistent performance in the wealth planning business will be sustained with continued organic growth driven by growth in employee planning and as well as incrementally better results from digital marketing as that sales channel gains traction,” Moody’s writes. “Flows in the workplace business should improve in 2024 as Moody's does not expect a repeat of the loss of two fairly large sponsors.”
A spokesman for Edelman declined to comment.
(The headline of this article has been edited to reflect Edelman's junk-bond rating was issued for a debt refinancing, not a change in outlook on the firm's current ability to meet its obligations.)