Shareholders will be wiped out, while bond holders will own broker-dealer
Jan 4, 2016 @ 3:47 pm
Reeling under hundreds of millions of dollars in debt, RCS Capital Corp. said on Monday it planned to file for Chapter 11 bankruptcy protection by the end of the month as part of a broad company restructuring.
At the same time, RCS Capital said it had reached an agreement with a majority of its first and second lien bondholders to establish its retail broker-dealer network, Cetera Financial Group, as a subsidiary of a new company that will be controlled and owned — post bankruptcy — by those same debtholders.
Cetera Financial Group, with 9,500 financial advisers at 10 different broker-dealers, will not be part of the bankruptcy proceeding, according to a statement by RCS Capital, or RCAP. The current chief executive of RCAP, Larry Roth, will remain the CEO of the new Cetera, which is expected to emerge as a separate, privately held company during the second quarter of this year.
As part of RCAP’s corporate restructuring, Cetera Financial Group is receiving a $150 million infusion of new capital from the current owners of RCAP debt, which include large financial institutions. The current owners of its common and preferred shares, however, are having their investment wiped out under the bankruptcy. The restructuring reduces RCAP’s debt and obligations from $1.1 billion to a little more than half that amount, or $650 million.
Since the summer, RCAP has been selling or closing assets of the companies that are not directly connected to the retail brokerage business of Cetera Financial.
“This announcement marks a fresh start that will place the issues of the past firmly behind Cetera,” said Mr. Roth in a statement. “We now have a very clear path forward for Cetera to be transformed into a private, independently run organization dedicated exclusively to the financial advisers and financial institutions we support.”
RCAP was assembled by the former nontraded REIT czar Nicholas Schorsch, who was formerly the company’s non-executive chairman and largest shareholder.
RCAP listed in June 2013 but hit a major speed bump in October 2014 when another company Mr. Schorsch controlled, American Realty Capital Properties Inc., now Vereit Inc., announced a $23 million accounting error over the first half of 2014 that was left intentionally uncorrected.
At the time, RCAP shares were trading at close to $19. Sales of nontraded real estate investment trusts by an RCAP affiliate, Realty Capital Securities, were cut in half last year, damaging the company’s outlook. RCAP took another blow in November when the Massachusetts Securities Division charged Realty Capital Securities with fraudulently rounding up proxy votes to support real estate deals sponsored by Nicholas Schorsch’s AR Capital. Those charges were later settled, with Realty Capital Securities agreeing to pay a $3 million fine and close its doors.
By the end of last month, RCAP shares were trading at 30 cents. Before its bankruptcy, RCAP was reeling under the burden of $800 million in long-term debt plus another $300 million in obligations, including the interest payments on preferred shares.
The restructuring agreement also includes a retention program for Cetera advisers and employees, according to the company statement.
“The actions announced today, while extremely difficult for some of our constituents, will ultimately position the new Cetera as one of the nation’s leading independent broker-dealers with new capital, a solid balance sheet and significant long-term growth opportunities,” RCAP spokesman Andrew Backman said in a statement.
Our firm has been using Blue Vault from the first year it was available.
We have found it to be a valuable tool to verify what wholesalers tell us and to dig deep into how the reported investments are really performing.
We appreciate that Blue Vault has expanded its services from initially covering REIT's to now also including BDC's.
Our clients also appreciate that we conduct this additional due diligence on their behalf.