KBRA Affirms Ratings for Wedbush Financial Services, LLC

KBRA affirms the issuer and senior unsecured debt ratings of BBB- for Los Angeles, California-based Wedbush Financial Services, LLC ("WFS"). Additionally, KBRA affirms the issuer rating of BBB for the primary operating subsidiary, Wedbush Securities Inc. ("Wedbush" or "the company"), which is registered as a broker-dealer with the SEC, a Futures Commission Merchant and Swap Dealer with the CFTC, as well as an SEC-registered RIA, a self-clearing member of NYSE and CME, and a member of FINRA. The Outlook for all ratings is Stable.

Key Credit Considerations

The ratings are supported by Wedbush’s well-diversified broker-dealer business model that has produced fairly consistent, competitive core returns over the years. The company’s management team, which, in recent years, has continued to execute on various strategic initiatives to selectively refocus, revitalize, and grow the company in key areas, remains a credit strength. KBRA also views Wedbush’s lower risk appetite favorably, recognizing the alignment between ownership/management, risk-taking, and capital preservation. Also supporting ratings are favorable franchise elements across the company’s businesses that benefit from being the largest privately-owned investment bank headquartered and mostly positioned in the Western U.S.

Following challenged earnings performance in FY23 (fiscal year ending June 30th) that was largely driven by select one-time charges and pressure on certain business segments from the higher interest rate environment—the company’s profitability has shown signs of normalization during FY24 and into FY25. KBRA maintains a positive view of the diverse revenue streams and complementary business model, recognizing the potential for further enhancements to returns from the tailwinds stemming from various strategic initiatives, as well as the possibility of improving market conditions and a more favorable regulatory environment. Ratings have historically been partially constrained by a regulatory compliance record, that, while not particularly different than peers, does reflect some prior period challenges. However, we note the proactive approach to address these legacy regulatory and legal issues, and recognize some reasonable resolutions, while also acknowledging that the proof of success will be borne out through the fullness of time. We also note that the pace of new regulatory issues has slowed, and KBRA has confidence in the direction and oversight of regulatory compliance, a sentiment we believe is shared by Wedbush’s regulators based upon management commentary. Reported leverage runs somewhat above similar peers, though this is partially offset by the composition of the capital stack, as well as a lower risk balance sheet with collateralized financing being largely matched-book.

Rating Sensitivities

Given the Stable Outlook, upward movement in ratings in the near-term is unlikely. However, ratings could move higher over time with the continued upward trend in profitability measures in tandem with the company's strategic initiatives, as well as further evidence of improvement in regulatory compliance oversight and controls, and lower financial leverage. Conversely, a meaningful change in strategy or financial management resulting in a material increase in risk appetite, more aggressive liquidity management and/or materially higher leverage could lead to a rating downgrade. Additionally, evidence of outsized or sustained pressure arising from market challenges could result in rating pressure.

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Methodologies