Moody’s, S&P Look to Possible Downgrades of Cetera Debt

Last week, Cetera Financial announced plans to acquire Avantax, the $84 billion, publicly-traded tax-focused wealth management firm, for $1.2 billion in cash. Two ratings agencies have since said they are reviewing Cetera’s credit ratings for a possible downgrade, citing concerns that the acquisition could weaken the company’s financial profile.

Last Wednesday, Moody’s Investors Service said it was reviewing several bonds of Aretec Group (Cetera’s parent company) for downgrade, including its B2 corporate family rating, B1 senior secured bank credit facility rating and Caa1 senior unsecured rating. Previously, Moody’s outlook was stable.

The action reflects Moody’s concern that the transaction will likely require Aretec to issue a significant amount of debt to fund the purchase and could lead to a worsening in its debt leverage and interest coverage. Moody’s also cited possible credit benefits of the acquisition, including adding significant scale and synergies that may come out of it.

“Aretec’s ratings could be downgraded should Moody’s conclude that Aretec is unlikely to sustain its Moody’s-adjusted debt/EBITDA leverage at or below 6.5x and its EBITDA/Interest Expense ratio at or above 2x following the acquisition,” Moody’s said, in its report.

S&P Global Ratings announced last Thursday that it had placed Aretec’s B issuer credit and senior secured debt ratings and its CCC+ senior unsecured rating on CreditWatch negative, saying the “mostly debt-financed acquisition of Avantax could weaken credit metrics, although the final capital structure and debt terms have not yet been determined.” That means the rating agency may downgrade these ratings in the coming months if the analysts don’t believe the firm can maintain an S&P-adjusted debt-to-EBITDA ratio below 6x or interest coverage above 2x.

“While Aretec’s relatively low leverage (of below 4x as of June 30 on a pro-forma basis including the recently closed Securian acquisition) provides some flexibility to take on additional debt compared with our downside threshold of 6x, we expect a meaningful deterioration in our adjusted leverage and interest coverage metrics given the large size of the Avantax acquisition,” S&P wrote.

“In deals like this, it is common for credit-ratings agencies to place a company on watch or review, and even more common when a public company is involved due to the amount of information that is in the public domain,” said a spokesperson for Cetera, in a statement. “This is standard procedure to notify the public that the deal has yet to be reviewed, and to be clear, there is no change to our credit rating or our rating outlook at this time.”

In a deal expected to close by the end of the year, Avantax will be de-listed from the Nasdaq exchange and become a standalone business unit within the Cetera ecosystem, with Cetera retaining the company’s core technology, legal entities, product offerings and clearing and custody relationships. Avantax is expected to add 3,000 advisors and $85 billion in total client assets.

In a recent flash poll conducted by WealthManagement.com, a number of Avantax advisors—weary of yet another ownership change and bruised by some leadership turmoil in recent years—said the acquisition by Cetera makes them more likely to consider changing firms; a smaller group expects improvements from the new owner’s scale and stability.

Earlier this year, Cetera got a boost from increased cash sweep revenue with the move to higher interest rates. Both Moody’s and S&P Global Ratings upgraded their credit ratings for the firm in March, with Moody’s citing improving profitability, greater scale and the strategic benefits of the Securian Financial Group acquisition.