Moody’s Investors Service has assigned an overall “B3” rating to Cetera Financial Group’s parent, Aretec Group, which is seeking to raise $1.015 billion in new senior secured debt. Moody’s described Cetera’s financial outlook as stable, citing better than expected advisor retention.
The rating comes after Genstar Capital reportedly invested more than $600 million in equity to finance a $1.68 billion acquisition of Cetera and its holding company. Different tranches of Aretec debt received different ratings ranging from “B2” to “Caa2.”
Moody’s wrote, “The B3 Corporate Family Rating reflects Aretec's high debt/EBITDA of around 7.5x pro forma the acquisition (including Moody's standard adjustments), a stabilizing financial advisor base, favorable macroeconomic and market environment and growing client asset levels.
“Aretec's retention of advisors has been stronger than expected, which will allow the firm to regain its revenue growth targets at a faster pace. The firm's increase in debt following the acquisition pressures the firm's financial flexibility and limits its room for additional debt at the existing rating level.
“Aretec's revenues stand to benefit from macroeconomic tailwinds, including a rising interest rate environment as well as strengthening levels of client assets driven by the overall favorable equity markets, but also stronger growth in net new assets. Moody's ratings also reflect a difficult operating and regulatory environment for independent broker-dealers requiring them to constantly invest in systems and processes to maintain their compliance.
“The rating outlook is stable, reflecting a stabilizing financial advisor base and client assets under administration. Moody's expects net revenues and EBITDA to slowly increase driven by macroeconomic factors, allowing the firm to slowly deleverage from its level following the acquisition.
“Factors that could lead to an upgrade:
“Improving debt leverage to a level below 5.5x (including Moody's standard adjustments) on a sustained basis.
“Strong advisor recruitment, and advisor retention rates, leading to growth in client assets and improving profitability.
Among the factors that could lead to a downgrade are these: