Moody’s Rankings and S&P World Rankings not too long ago issued adverse outlooks on RIA aggregator Focus Monetary Companions and Edelman Monetary Engines, an RIA with $284 billion in property beneath administration.
Moody’s not too long ago affirmed Focus’s B1 company household score, senior secured financial institution credit score facility rankings and its B1-PD chance of default score. However analysts modified their outlook on the rankings from steady to adverse, citing Focus’s current transfer to consolidate its 90 companion companies into just a few “hub” companies.
“Whereas Focus’s new strategic initiative to determine managed wealth administration companies is a significant shift from its unique enterprise mannequin, it goals at addressing the corporate’s weak profitability, as measured by Moody’s, relative to friends,” Moody’s writes.
Focus, which was taken personal in a sale to Clayton, Dubilier & Rice final yr, not too long ago mixed two of its largest companion companies, Buckingham Strategic Wealth and The Colony Group, to create a $50.2 billion RIA. Focus has already purchased out the administration groups of seven of its 90 companion companies, in keeping with Moody’s.
“The administration settlement buyouts are sometimes structured with a mixture of money and fairness that aligns the pursuits of Focus and the promoting principals,” Moody’s writes. “Nevertheless, extra future money funds, which Moody’s contains in Focus’s adjusted debt, could also be paid to the sellers upon reaching sure development metrics.
Focus’s debt-to-EBITDA ratio was 6.1 occasions as of the tip of 2023, up from 5.1 occasions in 2022. It’s now above Moody’s expectations for B1-rated corporations.
“As a result of the transactions are expensed in keeping with GAAP and the timing of synergies is unsure, Moody’s doesn’t anticipate significant enchancment to Focus’s profitability, as measured by Moody’s, over the outlook interval,” Moody’s writes. “That mentioned, adjusted EBITDA margins, beneath the brand new enterprise mannequin, are anticipated to increase over the following a number of quarters.”
A spokesman for Focus didn’t return a request for remark previous to publication.
Edelman Monetary Engines not too long ago proposed a brand new $575 million second-lien time period mortgage due October 2028 to refinance the agency’s present second-lien time period mortgage due in July 2026. S&P World Rankings assigned it a CCC+ debt score, which is in junk bond territory.
Moody’s assigned a Caa2 score to the time period mortgage, one notch decrease than S&P’s score, calling it a “leverage-neutral transaction.” It additionally assigned a B2 score to the agency’s proposed 2028-backed senior secured revolving credit score facility, which replaces the present credit score facility. Each rankings are in junk territory.
The score company factors to a robust 2023 for Edelman, citing stronger fairness markets, good price management and decrease advertising spending because the agency transitioned from “high-cost radio advertising to low-cost digital advertising.” Moody’s additionally factors to the agency’s success in changing office (worker planning) shoppers into wealth planning shoppers.
“The steady outlook displays Moody’s view that the constant efficiency within the wealth planning enterprise might be sustained with continued natural development pushed by development in worker planning and in addition to incrementally higher outcomes from digital advertising as that gross sales channel positive factors traction,” Moody’s writes. “Flows within the office enterprise ought to enhance in 2024 as Moody’s doesn’t anticipate a repeat of the lack of two pretty massive sponsors.”
A spokesman for Edelman declined to remark.
(The headline of this text has been edited to replicate Edelman’s junk-bond score was issued for a debt refinancing, not a change in outlook on the agency’s present skill to satisfy its obligations.)
