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Global Credit Research - 07 May 2013
New York, May 07, 2013 -- Moody's Investors Service today affirmed the Ba2 Corporate Family Rating
of LPL Holdings, Inc in anticipation of the company's debt
refinancing. Moody's also assigned a Ba2 rating to the proposed
new term loan. The rating outlook for LPL remains stable.
RATINGS RATIONALE
LPL is the largest independent retail brokerage firm in the United States
with 13,300 financial advisors while managing $394 billion
in clients' assets as of March 31, 2013. The scale of LPL's
franchise and favorable long-term industry trends have allowed
LPL to produce sufficient and predictable operating earnings relative
to its debt service requirements. Moody's said that LPL has achieved
consistent growth in revenues and operating earnings that have resulted
in significant cash flow deleveraging since its buyout in 2005.
At the same time, the proposed $237 million increase in term
debt will be primarily used for general corporate purposes and potentially
share repurchases over next several quarters. This will temporarily
reverse LPL's trend of cash flow deleveraging. LPL faces
other challenges including a tangible equity deficit that will increase
as a result of the debt add on, modest operating profitability relative
to non-independent broker dealer peers, as well as a high
dependency on annuity and mutual fund commissions - asset classes
that may be threatened by less expensive investment alternatives (e.g.
ETF index funds). Lastly, Moody's noted that LPL, like
all brokers with a fiduciary responsibility, is vulnerable to regulatory
or litigation risk. Although the company's compliance record and
function have been solid, any problems that expose LPL to material
financial or reputational damage would be negative for the company.
Despite the uptick in cash flow leverage, Moody's expects LPL's
credit metrics to resume their gradual improvement over the medium term.
LPL operating profitability should continue to benefit from a continued
addition of brokers to LPL's platform, a gradual increase
in broker productivity as they transition their business from legacy firms,
and a steady stream of asset-based revenue on approximately $371
billion of non-cash client assets. In addition, over
the medium to longer-term, rising interest rates should increase
the interest income and fee revenue LPL generates from more than $20
billion in customer cash assets. However, Moody's also
noted that given LPL's increased debt levels, the firm could
also be exposed to substantially higher debt service costs if rates were
to rise significantly. Moody's noted that LPL has been successful
in generating consistent and significant operating cash even under recent
moderate customer trading volumes and the ongoing low interest rate environment.
This is an important credit strength for the firm. However,
the firm is also an active acquirer, and has often used debt to
finance its acquisitions. Moody's said that any material
debt financed acquisition could lead to a spike in cash flow leverage,
which would put downward pressure on the ratings.
For the first quarter ended on March 31, 2013, LPL reported
$975 million in net revenue and $55 million in net earnings.
The principal methodology used in this rating was Global Securities Industry
Methodology published in December 2006. Please see the Credit Policy
page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Al Bush
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Robert Franklyn Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Affirms Ba2 Rating of LPL Holdings, Inc and Refinanced Senior Secured Credit Facility.
No Related Data.
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