Advisor Group Raises $500M in Debt for B/D Acquisitions – Wealth Management | Vette Leader

Advisor Group last week announced plans to issue $475 million in senior secured notes to fund acquisitions of American Portfolios Financial Services and Infinex Financial Holdings, a broker/dealer that supports community-based banks and credit unions support.

“We are raising funds ahead of the closing of both acquisitions,” Advisor Group CFO Jon Frojen said in an email. “We are pleased that the offering was very successful in a challenging market for issuers.”

According to a BofA Securities document obtained by WealthManagement.comwas the final offering for $500,000 of Notes at an interest rate of 8.625%, due in 2027. BofA, the Lead Bookrunner, recommended that the Advisor Group initiate the offering “before the typical market slowdown heading into Labor Day.” .

In response, Moody’s rated the debt at B2 and changed the company’s outlook to positive from stable. The rating agency cited the credit benefits of both acquisitions, with Infinex providing a dedicated channel for advisors in the financial institutions market and American Portfolios adding to Advisor Group’s total client assets.

“Advisor Group has a strong track record of successful acquisitions, as evidenced by timely integrations and the effective realization of synergies,” said Moody’s. “The Company has identified significant synergies related to both acquisitions related to the contract alignment of vendors and strategic partners. Given the readily identifiable nature of these synergies, coupled with the company’s strong track record, Moody’s expects the majority of these to be realized by the end of 2023.”

Moody’s also affirmed Advisor Group’s other ratings, citing growth in client assets, revenue and the shift towards advisory-based business. The broker/dealer network is also “strongly positioned to benefit from rate hikes,” which will have a positive impact on its revenue and profitability, according to the rating agency.

“Interest income is a significant contributor to the company’s bottom line due to the interest insensitivity of customer cash balances in general,” Moody’s said.

Advisor Group’s debt-to-EBITDA ratio for the last 12 months (on an adjusted Moody’s basis) was around 7x at the end of 2021, up from 10.5x at the end of 2020. Moody’s expects it to reach 6.5x to 7x by the end of 2022.

However, Moody’s noted that its ratings also reflected the company’s “weak (though improving) pre-tax earnings, sensitivity to interest rates and other macroeconomic variables, and its ownership by a financial sponsor, which over time led to aggressive financial management measures such as others could lead to increases in debt.” In 2019, Advisor Group sold a 75% stake in Reverence Capital Partners, a private equity firm led by former Goldman Sachs banker Milton Berlinski.

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

Even if the company’s debt is upgraded, it still won’t be investment grade, said Jonathan Henschen, founder of recruitment firm Henschen & Associates of Marine in St. Croix, Minn.

“These are still speculative bonds and any major market correction could derail their plans for possible further downgrades,” Henschen said. “If you have a market-sensitive industry like a broker/dealer, it could severely impact your cash flow, and that can create a whole new set of problems.”

Henschen assumes that the Advisor Group will use the proceeds to pay retention bonuses to the sales staff. He says some reps with production around $250,000 were offered 15%, while larger producers with sales of $1 million or more are getting 20%. And while commitment bonuses are typically based on three-year maturities, these are seven-year notes, which he says are “overkill.”

“Out of respect, we don’t speak publicly about the details of consultant compensation,” Frojen said. “What we can say is that Advisor Group offers highly competitive compensation to advisors at every stage of their career with us, from the moment they are hired.”

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