Description

Summary

An attractive albeit opaque opportunity in the publicly traded baby bond unsecured notes of Ladenburg Thalman, currently trading at ~70% on the dollar and yielding ~15%. I believe that these are money good bonds and that they will trade higher in the coming months, due to their significant equity cushion and a well known and respected sponsor (Reverence Capital) in an industry where a default is a tremendous business risk; i.e., neither Reverence nor Advisor Group Holdings (the >$450bn AUM entity which purchased Ladenburg) could simply strand the Ladenburg bonds and bankrupt the issuing entity without meaningful blowback to their respective businesses. Given the relatively high coupon of these bonds, they could trade up +25-35% to ~90% of face value and still yield 8-10% to maturity and ~7-8% on a current yield basis.

This opportunity would appear to be illiquid and only suitable for personal accounts, but arising in a year where 1) the market is up, and 2) there is fear that capital gains tax rates may go up next year suggest that there could be considerable retail selling to harvest losses and offset gains elsewhere. Moreover, the market now firmly believes that interest rates are headed higher – this sure seems to be the case… but how far up, who knows as we’ve all heard it so many times before. Keep in mind, baby bonds are specifically structured and sold to retail investors, not institutional investor, so the retail selling component is far more important than you would normally expect.

Company Description

Ladenburg Thalmann & Co. Inc. (LTS) is an institutional investment bank and broker dealer that is most well known to this community; baby bonds, biotech deals, etc. LTS reported $107mm of book value as of YE2020, and is a wholly owned subsidiary of Advisor Group Holdings (“AGHI”).

AGHI, in turn, is an indirect wholly owned subsidiary of Ladenburg Thalmann Services, Inc. (“Ladenburg”), which is the issuer of the notes we are discussing.

Advisor Group Holdings is the parent to the following independent wealth management firms (book value figures as of YE2020 based on SEC-filed Focus Reports):

-          FSC Securities ($28mm book value)

-          Royal Alliance Associates ($201mm book value)

-          SagePoint Financial ($50mm book value)

-          Securities America Advisors ($301mm book value)

-          Triad Advisors ($127mm book value)

-          Woodbury Financial Services ($56mm book value)

The wealth management space has been extremely attractive for rollups in the past few years and the benefits of scale have become only more pronounced. For example, LTS has become one of a small universe of banks that can lead and participate in the growing area of baby bond issuances, thanks to their large retail distribution capabilities at AGHI. See the list of recent investment banking transactions to see how lucrative this can be: https://www.ladenburg.com/investment-banking/investment-banking/recent-transactions

Sell-Off Caused by OTC Markets Moving Bonds to “Expert Market”

The OTC made the decision to have Ladenburg securities traded only on the Expert Market since the Company hasn’t filed financials since April 2020. As a result, they can no longer be quoted publicly and are no longer deemed suitable for retail investors on most platforms. The immediate result was a sell off on low volume from ~$19-20/share across all four baby bonds. Note that for the vast majority of advisors who get paid via a “wrap fee”, Ladenburg bonds will no longer qualify as assets for which an advisor can be paid that fee. The incentive to sell for advisors should continue.

Valuation Summary

So, adding it all up, there is at least $763mm of book value in the wealth management firms at AGHI, for which comps such as Ameriprise Financial (AMP) or LPL Financial (LPLA) trade at 5.8x and 8.0 x book value, respectively. Using a 5x multiple takes us to $3.8bn of equity in these wealth management platforms supporting $2.6bn of debt at AGHI, and leaving $1.2bn of equity value for Ladenburg bondholders. Add in $200mm for LTS (JMP Group taken private for ~2x book value) and that leaves $1.4bn to cover $280mm of baby bonds.

As a Sanity check, we look to the monthly pay Ladenburg 8% preferreds, which the company has continued paying, as recently as November 12^th. No way that the Board of Directors would declare this dividend on unlisted preferreds from a private, non-reporting company if there were any concerns about ability to pay its debt.

Why Opportunity Exists – AKA, why are we getting paid?

This cap stack couples illiquidity and opacity. Even those who know to look at Focus Reports for Ladenburg’s various subsidiaries will have to read carefully to see that Ladenburg is actually the parent company to Advisor Group Holdings and its half dozen wealth management subsidiaries. Then, they will need to have access to AGHI financials (private, but accessible in part via Bloomberg and the company’s website behind a wall).

CAN’T WE GET MORE CURRENT FINANCIAL INFORMATION?

Clients of the various broker dealers should be able to get more current financial information, as they are entitled to twice per year updates on the financial health of their trading counterparts. However, this would not make clear the nature of liabilities at the parent companies, AGHI and Ladenburg. We would suggest that the mere fact that all of these various assets have been rolled up underneath Ladenburg leaves bondholders in a very strong position – underscored by the annual disclosure to the wide public via Focus Reports on ownership at each of AGHI’s subsidiaries.

Catalyst

Continued coupon payments