Advisor Group Raises $500M in Debt Financing for B/D Acquisitions

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Advisor Group last week announced plans 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 backs community banks. and credit unions.

“We are raising the funds prior to completing both acquisitions,” Jon Frojen, Advisor Group’s chief financial officer, said in an email. “We are delighted that the offering has been a great success in a difficult market for issuers.”

According to a BofA Securities document obtained by WealthManagement.comthe final offer was for $500 million in notes at an interest rate of 8.625%, due 2027. BofA, the lead bookrunner, recommended that Advisor Group launch the offer “before the typical downturn in the market before 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 the two acquisitions, with Infinex providing a dedicated channel for advisors in the financial institutions market and American Portfolios increasing the total assets of Advisor Group clients.

“Advisor Group has a strong track record of successful acquisitions, as evidenced by timely integrations and the effective realization of synergies,” Moody’s said. “The company has identified substantial synergies associated with acquisitions related to contract alignments with suppliers and strategic partners. Given the easily identifiable nature of these synergies as well as the company’s strong track record, Moody’s expects that the bulk of these will be achieved by the end of 2023.”

Moody’s also affirmed Advisor Group’s other ratings, citing its growth in client assets, revenue and shift to advisory-based businesses. The brokerage network is also “strongly positioned to benefit from interest rate increases”, which will have a positive impact on its revenues and profitability, the rating agency said.

“Interest income generally significantly increases a company’s bottom line due to the rate insensitivity of customer cash balances,” Moody’s said.

Advisor Group’s trailing 12-month debt to EBITDA ratio (on a Moody’s adjusted basis) was approximately 7x at the end of 2021, compared to 10.5x at the end of 2020. Moody’s expects to reach 6.5x to 7x by the end of 2022.

That said, Moody’s said its ratings also reflected the company’s “low (albeit improving) pre-tax earnings, its sensitivity to interest rates and other macroeconomic variables, and its ownership by a financial sponsor , which could lead to aggressive money 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 led by former Goldman Sachs banker Milton Berlinski.

S&P Global Ratings gave the ratings a “B-” rating, one notch below Moody’s rating, and said it expects the market decline to put pressure on asset-based earnings. of the company.

Even if the company’s debt is upgraded, it will still be lower quality, said Jonathan Henschen, founder of recruiting firm Henschen & Associates at Marine in 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, that could significantly reduce their cash flow and that can cause new problems.”

Henschen expects Advisor Group to use the proceeds to pay retention bonuses to representatives. He says some reps with around $250,000 in production have been offered 15%, while big producers with $1 million or more in revenue get 20%. And while retention bonuses are usually based on three-year terms, these are seven-year grades, which he says is “excessive”.

“Out of respect, we do not publicly discuss the details of advisor compensation,” Frojen said. “What we can say is that Advisor Group offers very competitive compensation for advisors at every stage of the professional life cycle with us, right from initial recruitment.”

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