TD Ameritrade (AMTD) Ratings Placed on Review for Upgrade by Moody's
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Moody's Investors Service, ("Moody's") has placed the ratings of TD Ameritrade Holding Corporation (Nasdaq: AMTD) on review for upgrade, including its A3 long-term issuer rating and A3 senior unsecured debt rating.
The rating action follows TD Ameritrade's announcement that it has agreed to acquire Scottrade Financial Services Inc. (Baa3 review for upgrade) for $4 billion to be funded with a combination of cash and the issuance of common shares valued at $1.45 billion. As part of the transaction, TD Bank, N.A. (deposits Aa1/issuer rating A1 stable, BCA a2) will acquire Scottrade's bank subsidiary, Scottrade Bank (unrated), for $1.3 billion in cash. The acquisition requires a number of regulatory approvals and is expected to be completed in the second half of 2017.
Issuer: TD Ameritrade Holding Corporation
..On Review for Upgrade:
.... Issuer Rating, currently A3
.... Senior Unsecured Regular Bond/Debenture, currently A3
.... Senior Unsecured Shelf, currently (P)A3
....Outlook, Changed To Rating Under Review From Positive
Moody's said the rating action reflects the transaction's conservative financial structure as well as the benefits the acquisition is expected to bring to TD Ameritrade's credit profile.
TD Ameritrade's purchase of Scottrade will be funded with the $1.3 billion in proceeds from the sale of Scottrade Bank, the issuance of $1.4 billion of TD Ameritrade common shares, $400 million of new debt, and $900 million of cash on hand. Upon the consummation of the transaction TD Ameritrade intends to pay off the existing $385 million Scottrade senior notes. As a result, the transaction will only slightly increase TD Ameritrade's leverage.
Moody's noted that the acquisition will bolster TD Ameritrade's scale, helping the firm to remain competitive in a consolidating industry. On a pro forma basis TD Ameritrade's customer assets will increase by nearly a quarter and its number of client accounts will increase by almost half.
The sale of Scottrade Bank reduces the pro-forma revenues and cash flows of the combined TD Ameritrade/Scottrade, the rating agency said. However, this will be partially offset by fees TD Ameritrade will receive from TD Bank, N.A. under its existing insured deposit account (IDA) agreement for the deposits from Scottrade clients.
The loss of revenue from Scottrade Bank will initially cause a modest deterioration in TD Ameritrade's debt service metrics. However, TD Ameritrade's scale should allow it to extract significant cost savings from the merger, enhancing its profitability and reducing its cash flow leverage. In addition, the combined firm's broader product set and distribution capabilities should provide TD Ameritrade with the opportunity to increase its share of wallet with Scottrade's existing clients.
The review will focus on the pro forma financial impact of the acquisition and the timeline over which TD Ameritrade is likely to realize the benefits of the transaction.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE
The ratings are currently on review for upgrade. Completion of the acquisition of Scottrade as announced with a clear path toward achieving the projected integration benefits within 18 months of consummation would likely lead to an upgrade.
A sustained focus on organic growth, with increased diversification of the company's revenue base beyond client trading and IDA revenues, could result in upward rating pressure.
An increase in debt/EBITDA to over 2x, absent a coherent near-term deleveraging trajectory, could result in a downgrade. Also, a significant deterioration in franchise value, via a security breach of client accounts, a sustained service outage, or a significant legal or compliance issue, could also result in a downgrade.
The principal methodology used in these ratings was Global Securities Industry Methodology published in May 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
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