RCS Capital filed for Chapter 11 bankruptcy on Sunday night in Delaware after reaching agreements with a majority of its creditors.
According to the complaint filed in Delaware bankruptcy court, RCS Capital has less than 50 creditors. The company listed its liabilities as between $100 million and $500 million, while its assets were between $1 billion and $10 billion.
Of the companies that hold the largest unsecured claims, RCS Capital has debts with eight firms for over $1 million. Wilmington Savings Fund Society has the largest unsecured claim, $120 million, while VEREIT Operating Partnership has a $15.3 million claim, according to court documents. Of the 30 companies cited as the largest unsecured creditors in the bankruptcy filing, at least four are well-known law firms such as Proskauer Rose and Winston and Strawn. Additionally, the company owes money to a variety of sources, such as Charles Schwab & Co. for just under $1 million, the Ritz-Carlton in California for about $46,00 and the NYC Department of Finance for about $50,000 in taxes.
Before filing on Sunday night, the parent of Cetera Financial Group reached agreements with over two-thirds of its first- and second-lien lenders, as well as the holders of a majority of the company’s unsecured debt, according to a source familiar with the matter. Because these agreements are already in place, the bankruptcy will take the form of a pre-arranged Chapter 11.
These first and second lien holders will become the majority owners of the newly formed private company, and all common and preferred equity in RCS Capital will be eliminated. There will be no relationship with Nicholas Schorsch and the former chairman will have no equity stake in the new company.
“The first and second lien holders, who represent top-tier institutional investors, are excited to work with Cetera Financial Group’s talented management team to continue to support what is already recognized as an industry-leading platform for advisors and financial institutions,” said Saul Burian, managing director at Houlihan Lokey and an advisor to the first lien lenders, in a statement. “We expect an expeditious restructuring that allows Cetera Financial Group to thrive as an independent private company.”
RCAP said its independent broker/dealers currently operating within the Cetera Financial network will not be involved in the bankruptcy. However, the holding companies associated with its b/ds, including First Allied, Summit Brokerage Services and VSR Financial, are guarantors of RCS Capital’s debt and therefore will be filing for Chapter 11 bankruptcy in March.
RCS Capital does not expect the bankruptcy proceedings to significantly affect any of the advisors or vendors involved.
Once RCAP emerges from bankruptcy, expected in the second quarter, the restructured company will focus solely on retail brokerage services.
“These actions continue to advance our broader plan to become a Cetera-only, independent, well-capitalized, private company, no longer burdened with legacy issues,” Cetera CEO Larry Roth said in a statement. “Our restructuring provides Cetera with a truly fresh start, including the additional capital to continue to invest in the best possible platforms, products and services for the financial advisors and financial institutions we support.”
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 new company. Distributions to advisors are expected to take place over the next couple of months.
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.
Bradley Scher, an independent director and chairman of the executive committee, took over as CEO from Larry Roth on Jan. 22. Scher, 55, is the managing member of Ocean Ridge Capital Advisors, an independent consulting company with experience helping companies through bankruptcy proceedings.
Roth, who still serves as head of Cetera, oversees the constellation of firms Nicholas Schorsch stitched together over the past few years. Cetera has some 9,500 brokers, making it the second largest independent brokerage group in the United States.
Updated at 7:15 a.m. on Feb. 1, 2016 to include information filed with the bankruptcy complaint. Additional reporting by Diana Britton.