Waddell & Reed Financial, Inc. 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. 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.
Two companies that I found experienced downgrades related to stock performance or bond ratings within the last five years are Exxon Mobil and Tesla Inc. Exxon Mobil Corp is an American multinational oil and gas corporation while Tesla is an American automotive and energy company. Both companies’ downgrade is mostly caused by their deteriorating finances, high debt levels, weak liquidity position. The way these downgrades would impact the audit risk is that they provide the auditors an idea of the future viability of the company. Downgrades suggest that the debt of the corporation is more than its receivables or that the company has improper management. This would help auditors know that the business risk is high for lenders and even the investors may not get their money back.
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