Waddell & Reed Rating Downgraded By Moody's, Outlook Stable

Waddell & Reed Financial, Inc.’s (NYSE:WDR) issuer rating has been downgraded from Baa3 to Ba1 and the company has been assigned a Corporate Family Rating (CFR) of Ba1 by Moody's Investors Service, a rating arm of Moody's Corporation. Simultaneously, the company’s outlook has been changed to stable from negative.

Reasons for the Rating Downgrade & Stable Outlook

Owing to a challenging business environment and continuous net outflows across all of its distribution channels, Waddell & Reed has been reporting a fall in its assets under management (AUM) since the past few years. Over the last five years (2013-2017), AUM decreased at a CAGR of 10.5%. As a result, its competitive position within the industry weakened.

Adding to this, the presence of substantial intangibles on the company’s balance sheet increases risk. Moreover, looking at the company’s recent investments, the reinvestment of $300 million of its cash reserves into a portfolio of investment grade fixed income securities with a one-year average duration increases its market risk.

It is because of the above-mentioned reasons that Moody’s went for a rating downgrade. Moreover, Moody’s believes that though the company is taking several initiatives to improve efficiency, optimize operations and modernize its Retail Broker-Dealer channel by providing additional support to its advisors through training opportunities and enhanced technology tools, these are not sufficient to improve its credit profile that has been impacted negatively because of the deterioration in its investment management business' competitive position.

Additionally, because of an increased focus toward passive investment management, regaining its competitive position, particularly within the Retail Unaffiliated Distribution channel, is not expected in the near future, according to Moody’s.

Nevertheless, Moody’s upgraded the company’s outlook from negative to stable as it believes that the steps taken to modernize the Broker-Dealer channel would lead to slight improvement in margin and it would help the company’s fundamental business model to diversify economically. This is because, going forward, a portion of the company’s assets will become less dependent on the investment performance of its funds for asset retention and replacement.

What Can Drive the Ratings Up

Per Moody’s, a rating upgrade can take place if the company witnesses sustained rise in net flows with replacement rates of more than 100%, has retention rates of more than 80% and delivers continued growth in revenues with investment performance improvement.

What Can Bring the Ratings Down

On the other hand, a downward pressure on ratings can occur if there is an increased decline in AUM, if losses develop in the company's corporate bond investments or the company is unable to improve its investment performance materially.

Shares of Waddell & Reed have gained 14.7% in the past six months, marginally outperforming 14.3% growth for the industry.

The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Notably, the rating agency has put a few of the finance companies like Barclays (LON:BARC) PLC (NYSE:BCS) , E*TRADE Financial Corporation (NASDAQ:ETFC) and U.S. Bancorp (NYSE:USB) under review.

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U.S. Bancorp (USB): Free Stock Analysis Report

Barclays PLC (BCS): Free Stock Analysis Report

E*TRADE Financial Corporation (ETFC): Free Stock Analysis Report

Waddell & Reed Financial, Inc. (WDR): Free Stock Analysis Report

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