KBRA Affirms Ratings for Wedbush Financial Services, LLC
17 Nov 2023 | New York
KBRA affirms the issuer and senior unsecured debt ratings of BBB- for Los Angeles (CA)-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 dually registered as a broker-dealer with the SEC and as a FCM 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 in recent years, notwithstanding some select one-time charges during FY23. 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.
Despite the noted decline in Wedbush’s reported FY23 earnings, KBRA considers the company’s core earnings trends to be sustainable at a solid level, given the mix of business lines and diversity of revenue, which appear to be complementary in nature; both with respect to partially dampening economic countercyclicality inherent in the brokerage industry and reflecting important operating synergies across segments. 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 issues and recognize early wins, 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 have confidence in the direction and oversight of regulatory compliance, a sentiment we believe is shared by Wedbush’s regulators based upon management commentary. Additionally, Wedbush previously exhibited some degree of deferred investment. With respect to personnel development, this has been addressed through active bench building, led by change enactors at the executive level. On the technology side, in FY22, Wedbush began in earnest a multi-year investment strategy to modernize its platforms so as to deliver a scalable and improved experience for all stakeholders. 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 matched-book collateralized financing.
Given the Stable Outlook, upward movement in ratings in the near-term is unlikely. However, ratings could move higher over time with meaningful development in the scale in, and scope of, Wedbush’s wealth management franchise, 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 a downgrade.
To access rating and relevant documents, click here.