RCS Capital (RCAP) said Monday it intends to file for prearranged Chapter 11 bankruptcy by the end of the month and has negotiated a $150 million investment from its lenders to keep Cetera Financial Group’s doors open. Once RCAP emerges from bankruptcy, the restructured company plans to focus solely on its retail brokerage services.
“The purpose of the Chapter 11 filing is to improve RCS Capital's balance sheet and capital structure by eliminating certain non-core assets and liabilities,” the company said, in a statement. The proposed bankruptcy is expected to eliminate RCS Capital's common and preferred equity obligations and discharge the company's corporate overhead expenses and other liabilities.
RCAP said its independent broker/dealers currently operating within the Cetera Financial network will not be involved in the bankruptcy filing; therefore, the company believes firms such as First Allied, Summit Brokerage Services and VSR Financial, as well as the advisors and vendors involved will remain largely unaffected by the proceedings. RCS Capital said Monday it expects to complete its bankruptcy case during the second quarter of 2016.
“We now have a very clear path forward for Cetera to be transformed into a private, independently run organization dedicated exclusively to the financial advisors and financial institutions we support,” said Larry Roth, CEO of Cetera. “This has not always been an easy journey, and we thank the advisors and institutions we serve for the remarkable loyalty and patience they have shown to us throughout this time."
As part of RCAP’s agreement with its lenders, Cetera’s advisors and key employees will be offered retention packages in the form of cash and equity in the newly formed company.
“We emphasize to the advisors and institutions we support that we do not expect the proposed restructuring of RCS Capital to impact the existing deferred compensation plans or other related compensation plans at Cetera, which are expected to remain in effect in their current form,” Roth added.
RCAP has been mired in turbulence since October 2014, when a formerly related company announced a $23 million accounting error. In November 2015, a unit of the company, Realty Capital Securities, was charged by Massachusetts' top securities regulator with fraudulently casting shareholder proxy votes.
RCAP’s CEO Michael Weil recently stepped down from his position after a year on the job. Larry Roth, head of Cetera, replaced him and oversees the constellation of firms Nicholas Schorsch stitched together over the past few years. Cetera has some 9,500 brokers, the second largest independent brokerage group in the U.S.
In the last year, the company’s stock is down 97 percent. Late last year, the New York Stock Exchange said it would delist RCS Capital common stock if the firm doesn't get its stock price above $1 a share in the next six months.
And last month, Moody’s Investors Service downgraded RCS Capital's corporate credit rating from B3 to Caa1 with a negative outlook. Moody’s cited the firm’s diminished ability to pay down its debt from ongoing activities and the risk that it may not find new investments for the change.
AR Capital, the non-traded REIT sponsor built by Schorsch, who is also a shareholder of RCAP, recently announced it would no longer create new products or raise capital in existing products. The firm said the move was due to regulatory and market uncertainty affecting capital raising for new and existing offerings.
The firm has been cash-strapped. Private equity asset manager Apollo Global Management had planned to buy the firm’s wholesale broker/dealer business for $25 million, but later reduced the price to $6 million in cash. Apollo also called off the deal to purchase the asset management business of AR Capital. Instead, AR Capital is purchasing $25 million of RCAP preferred stock from Apollo for $25.6 million.
RCAP recently outlined plans to raise capital, including selling Hatteras, its liquid alternatives investment management platform, to the Hatteras Funds management group for $5.5 million and certain earn-out obligations. RCAP purchased Hatteras in the fall of 2013, under Schorsch, former head of RCAP.
The firm is in the process of winding down its wholesale distribution business, which should be completed by the end of the first quarter.
In December, the co-presidents of SK Research, RCAP's alternative investment due diligence and research arm, announced plans to purchase SK's assets and go independent. RCAP is also winding down its DirectInvest crowdfunding platform and plans to sell Trupoly, its white-label investor relationship portal.