The parent company of Cetera Financial Group received an upgrade in its corporate family rating from Moody's Investors Service, a sign of the benefits of its
Moody's gave the debt issued by Aretec — a holding company with the name of private equity-owned "Cetera" spelled backwards — a rating of "B2,"
In
Hack cited "Aretec's improving profitability, increasing scale and the strategic benefits of the acquisition, which together more than offset the initial increase in debt leverage that will be associated with the acquisition." He noted that Securian's wealth business spans more than 1,000 financial advisors with $47 billion in client assets, which will bring the total across Cetera and its four brokerages with 8,000 advisors to more than 9,000 with $365 billion.
"The bulk of the acquisition is structured so that Aretec acquires only advisor relationships and client assets, and not an entire corporate entity, and thereby partially mitigates integration and execution risks," Hack wrote.
Cetera, he added, "has a strong track record of successfully integrating similar acquisitions" and will "realize substantial synergies from its latest deal, including additional cash-sweep program revenue and strategic partner contract alignments. The rating upgrade also reflects Aretec's strong and stable franchise, sizable client asset levels and a more favorable shift toward advisory fees and away from less predictable transaction-based commission revenue."
Representatives for Cetera said no executives were available for an interview and didn't respond to questions about the Genstar Capital-backed firm's debt load.
Two of the largest branch networks of Cetera brokers — Omaha, Nebraska-based Carson Group and Newport Beach, California-based SageView Advisory Group — declined requests for interviews about the firm's views of Cetera's financing and strategy.
The chairman of a third major branch spanning 240 advisors, Dan May of
May said in an interview that he approved of Cetera's practice of
"I have no problem because I believe it's probably in the right quantity, the right formula," he said. "If they start tightening the budget, and things are squeaky and we're not seeing the growth initiative, that would be bothersome to me."
Last year, Cetera's recruiting efforts brought in advisors
"We've already got competency in dealing with insurance firms," Cetera CEO Adam Antoniades said in
Moody's changed the outlook of Cetera's parent from "positive" to "stable" based on the additional debt it's taking on with the Securian deal. That leverage will likely fall over the next year to 18 months, and neither it nor any future deals"will "significantly affect Aretec's key financial metrics," Hack wrote.
In terms of the firm's cash flow and profitability, Aretec's trailing 12-month ratio of debt to earnings before interest, taxes, depreciation and amortization, or EBITDA — a common measure of profitability — dropped to 5.8 at the end of the third quarter from 7.1 at the end of 2021. Even after a "temporary spike" stemming from the Securian deal, Hack wrote that his team expects the ratio to get to 5.0 by the end of this year.
By comparison, RIA consolidator Focus Financial Partners
Debt levels and the extent of future interest-rate hikes by the Federal Reserve loomed large in Moody's evaluations of Cetera's debt. Rising rates "will significantly boost Aretec's interest revenue and profitability in 2023," Hack wrote.
He added that "interest rate-driven revenue generally flows to the firm's bottom-line with little associated incremental expenses because of the rate-insensitivity of client cash balances. These benefits will more than offset lower advisory and commission fees if the level of broad equities markets should moderately decline."
