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Cetera’s “Capital Structure Review“ Is Focused on Debt Restructuring

No shareholders have looked to sell; the more likely scenario may be a debt restructuring.

Cetera Financial announced the launch of a “capital structure review,” and the company retained Goldman Sachs to help with the process, prompting several reports of a possible sale of the brokerage network. And while a sale, either in whole or in part, may be the result, the company is more interested in restructuring the high interest loans it still has on its books after emerging from Chapter 11 bankruptcy in spring 2016.

“It’s always possible that Cetera will be sold to a new buyer, but it’s just as possible right now that the immediate goal is more about debt restructuring than putting the company on the block,” said Jeff Nash, CEO of BridgeMark Strategies, a strategic consulting and M&A advisory firm for the financial advice industry.

“When Cetera emerged from Chapter 11 in 2016, the company came out of the process with restructured debt that carried high interest rates,” Nash added. “It seems like Cetera has performed well since emerging from bankruptcy in 2016, especially with advisor recruiting and retention, which means now would be a reasonable time for the company to use its increased creditworthiness to take out higher cost loans and replace them with lower cost loans. The debt structure isn’t chump change, and it would be irresponsible for a firm the size of Cetera to go through a process like this without partnering with an investment bank.”

At the time RCS Capital (Cetera’s parent before the restructuring) filed for bankruptcy, it had less than 50 creditors. RCAP listed its liabilities as between $100 million and $500 million, while its assets were between $1 billion and $10 billion. On Jan. 6, 2016, S&P Global Ratings lowered its long-term corporate credit rating on RCAP to D from CCC. (Its first rating, in March 2014, was B+.) Moody’s Investors Services also downgraded the company’s corporate family rating in February 2016 from Caa3 to Ca. At the time, the rating agency said RCAP had a $575 million senior secured first lien term loan, $25 million senior secured first lien revolving credit facility and $150 million senior secured second lien term loan.   

The firm’s first and second lien holders became the majority owners of the emerged company, renamed Aretec Group, which included Fortress Investment Group, Eaton Vance Management and Carlyle Investment Management. 

None of the shareholders have approached Cetera seeking a liquidity event, a spokesperson for Cetera said.

“We have just initiated this process and expect to commence a dialogue with our shareholders in the near future to assess their goals as part of this process,” the spokesperson said. “Beyond this, it would be premature to attempt to guess what various shareholders might want at this early stage.”

If sold, Cetera could fetch up to $1.5 billion, according to a Bloomberg report.

“I’m not surprised to hear that no one’s actually aggressively coming to them saying, ‘We want out’ because they actually are looking at what could be a 20 or 30 or more percent gain in 24 months, something a bond holder would never have realized,” Nash said. “It’s an industry sector that’s done really well in the last 12 months at a minimum, and with them coming off of a bottom bounce, arguably you could make the claim that they’re probably doing even better.” 

Since the bankruptcy restructuring, the firm is in a much better financial position.

“We have steadily produced cash flows well in excess of those required, and have materially de-levered since our emergence from our restructuring process,” the Cetera spokesperson said. “Last year, we renegotiated our credit facilities to much more favorable terms, and have subsequently—and voluntarily—prepaid a significant amount of debt already. Although our current loan terms are attractive, the leveraged finance markets continue to be constructive and at near-record lows in terms of pricing and spreads. Our strong financial performance (which has also lead to a ratings upgrade at one of the credit rating agencies), puts us in a position to consider even lower cost financing options with longer terms and less restrictive covenants.” 

The company’s credit rating was upgraded in 2017 by either Moody’s or Standard & Poor’s, according to an industry source with knowledge of Cetera’s capital structure.

“Just on a common sense basis, interest rates are going to be going up, best to restructure it while interest rates are low,” said Jonathan Henschen, president of the recruiting firm Henschen & Associates in Marine on St. Croix, Minn.

“And if they have a heavy debt burden, that interferes with their growth aspirations,” Henschen added. “Being the size that they are, going public would make sense. But if they want to grow and build mass, they need to lessen the debt load. If this is a way to do it, that’ll free them up to be more aggressive in growing.”

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