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Rating Action:

Moody's assigns a B2 CFR to Edelman Financial Holdings II, Inc.; outlook is stable

13 Jun 2018

New York, June 13, 2018 -- Moody's Investors Service, ("Moody's") has assigned a B2 Corporate Family Rating (CFR) and a B2-PD Probability of Default Rating to Edelman Financial Holdings II, Inc. (Holdings II). Moody's also assigned a B1 rating to Holding II's first lien senior secured credit facilities consisting of a $1,410 million term loan and a $150 million revolving credit facility. Moody's also assigned a Caa1 rating to Holding II's $495 million second lien term loan. Proceeds from these loans will be used to finance the acquisition of Financial Engines, Inc. (Financial Engines) by The Edelman Financial Center, LLC (Edelman), refinance Edelman's existing debt, and pay related fees and expenses. In addition, Moody's affirms Edelman's B2 CFR. The outlook on the ratings is stable.

Upon the contribution of FE's assets to Edelman by Holdings II, Holdings II will assign and Edelman will assume all obligations of Holdings II under the credit facilities noted above. At that time, Moody's will transfer Holding II's debt ratings to Edelman.

When the refinancing closes, Moody's will withdraw the ratings on Edelman's existing first lien senior secured credit facilities, consisting of a $480 million term loan and a $30 million revolving credit facility.

RATINGS RATIONALE

The affirmation of the B2 CFR reflects the improved scale, product and geographic diversification, and ultimately better growth opportunities that Financial Engines brings to Edelman. Financial Engines' market position in the 401(k) managed account space is strong and growing and includes some of the largest employers and recordkeepers in the US. We expect that Edelman's advisor business will complement Financial Engines' existing, though smaller, advisor business as both focus on holistic financial advice and technology-enabled planning, and that Edelman should benefit from differentiated lead generation and revenue growth by tapping Financial Engines' pool of workplace assets under management (AUM).

Historically, key man risk was a credit challenge for Edelman as co-founder Ric Edelman played an outsized role in client acquisition. Although Edelman will continue to work in an investor education capacity for the combined firm, reliance on him to source clients and drive revenue growth will be significantly reduced post-transaction.

"By combining with Financial Engines, we see an opportunity for Edelman to gain new portfolio allocation technologies and gain access to a new market segment which should help sustain its high growth trajectory," according to Moody's Assistant Vice-President Stefan Kahandaliyanage.

Balancing these strengths, the rating affirmation reflects integration risks stemming from each firm's well-established brand and culture as well as the potential for execution risk and business interruption in meeting targeted expense savings. Additionally, leverage as calculated by Moody's is elevated at 7.1x post-transaction and although the company and its private equity sponsor, Hellman & Friedman (H&F), are committed to paying down debt voluntarily, Moody's believes there is risk that H&F could relever the company to extract dividends.

The ratings are also sensitive to Moody's view on competition within the 401(k) managed account and independent RIA markets, specifically the impact of price competition and the potential for fee compression across the combined company's advice offerings.

The acquisition, which is expected to close in the third quarter of 2018, is subject to approval by Financial Engines stockholders, regulatory approval and other customary closing conditions.

RATINGS DRIVERS

The ratings could be upgraded if: 1) debt-to-EBITDA (including Moody's adjustments) is sustained below 5.5x; 2) the company is able to maintain high single to double digit revenue growth rate; and/or 3) pre-tax income margin rises above 15% on a consistent basis.

The ratings could be downgraded if: 1) there are significant declines in customer acquisition rates, client retention rates, and/or fee rates, particularly on the retail side of the business; 2) deleveraging via voluntary prepayments does not occur as planned; 3) Debt to EBITDA is sustained above 7x; and/or 4) there is a material weakening in the company's liquidity profile.

The following ratings were assigned to Edelman Financial Holdings II, Inc. with a stable outlook:

Corporate Family Rating - B2

Probability of Default Rating -- B2-PD

$1,410 million 1st Lien Term Loan -- B1

$150 million revolving credit facility - B1

$495 million 2nd Lien Term Loan -- Caa1

The following rating for The Edelman Financial Center, LLC was affirmed with a stable outlook:

Corporate Family Rating - B2

Upon the contribution of Financial Engines, Inc.'s assets to Edelman by Holdings II, Holdings II will assign and Edelman will assume all obligations of Holdings II under the credit facilities noted above. At that time, Moody's will transfer Holding II's debt ratings to Edelman.

When the refinancing closes, Moody's will withdraw the existing ratings from Edelman:

$480 million first lien senior secured term loan - B2

$30 million first lien senior secured revolving credit facility - B2

The Edelman Financial Center, LLC and Financial Engines, Inc. will together be one of the largest 401(k) managed account and independent Registered Investment Advisor firms providing integrated financial planning and investment management services in the United States.

The principal methodology used in these ratings was Asset Managers: Traditional and Alternative published in December 2015. Please see the Rating Methodologies 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Stefan G. Kahandaliyanage, CFA
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Marc R. Pinto, CFA
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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