RCS Capital to restructure debt through prearranged bankruptcy filing

By Caroline Salls

Pittsburgh, Jan. 4 – RCS Capital Corp. reached an agreement in principle with some of its key stakeholders for a new investment of $150 million and the restructuring of its debt and capital structure, according to a news release.

RCS said this agreement, which is supported by a steering committee of first-lien and second-lien lenders representing a majority of the principal amount outstanding, will allow it to restructure its debt and balance sheet and to focus on its retail advice division, Cetera Financial Group.

To implement its financial restructuring, RCS said it will make a prearranged Chapter 11 bankruptcy filing in late January.

The company said it agreed with its senior secured lenders to an expedited schedule for its emergence from Chapter 11, and Cetera’s member broker-dealer firms will not be involved in the filing.

Under the Chapter 11 filing, most of RCS Capital’s corporate overhead expenses and other liabilities, other than the restructured debt owed to its post-proceeding first-lien and second-lien secured creditors, will be discharged and eliminated.

The company said the Chapter 11 restructuring will also eliminate its common and preferred equity. Other than a new proposed equity retention program for Cetera financial advisers and key employees, RCS said substantially all of its equity following the restructuring will be owned by the current first-lien and second-lien lenders.

Specifically, RCS said the proposed restructuring calls for a reduction of debt and the elimination of preferred stock representing in excess of $500 million in total.

New investment

Also, the company said a group of its lenders have agreed in principle to invest $150 million in new working capital into Cetera. RCS and the Cetera senior leadership team intend to use this capital to make continued significant investments in technology, adviser growth and service enhancements for the financial institutions and financial advisers Cetera supports.

According to the release, the agreement includes a retention program for Cetera Financial Group-affiliated advisers and key employees made up of cash and equity in the new post-bankruptcy company. Cetera and RCS Capital’s lenders have agreed in principle that the reorganization will protect the current deferred compensation arrangements.

The restructuring and new investment is subject to the negotiation and execution of definitive documentation, regulatory, court and other approvals and obtaining the approval of the requisite first-lien and second-lien lenders and is expected to be completed during the second quarter of 2016.

“RCS Capital’s announcement today defines the path for transforming Cetera into a private, independently run organization that is dedicated exclusively to the financial advisers and financial institutions we support,” Cetera chief executive officer R. Lawrence “Larry” Roth said in the release. Roth will continue as Cetera’s CEO.

“The restructuring marks a fresh start that will place the issues of the past months firmly behind Cetera, while providing the financial adviser network with the capital and operational structure to profitably grow its market leadership.

Progress update

RCS Capital said it has made substantial progress over the past several months in selling or closing non-core assets, in addition to other corporate governance and leadership changes.

The company said these steps included:

• Winding down Realty Capital Securities’ wholesale distribution business, a process which is expected to be completed by the end of the first quarter;

• Winding down RCS Capital’s investment banking, capital markets and related advisory services business;

• The sale of Hatteras for $5.5 million to its previous owners and management and the elimination of roughly $20 million of earn out liabilities. This sale is expected to close during the first quarter;

• Entering into a letter of intent to sell SK Research to previous owners and management. This sale is expected to close later this month;

• Evaluation of strategic alternatives for transfer agency business American National Stock Transfer and electronic subscription processing and cybersecurity business Docupace Technologies; and

• Winding down the DirectVest crowdfunding platform and the sale of Trupoly white-label investor relationship portal.

Forbearance agreements

In addition, RCS said it has entered into forbearance agreements with a majority of first-lien and second-lien lenders and the holders of its existing convertible notes.

The company said the forbearances include an agreement to forgo the payment of $19.4 million of principal and interest that would have otherwise been due on Dec. 31 to Jan. 29 and an agreement to allow RCS to retain the net cash proceeds from the sale of the Hatteras business.

Bradley Scher has been appointed as a member of the company’s board of directors, effective immediately, the release said.

RCS Capital is a New York-based investment firm focused on the individual retail investor.

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