RCS Capital files bankruptcy; Chapter 11 plan gives equity to lenders

By Caroline Salls

Pittsburgh, Feb. 1 – RCS Capital Corp. made a prearranged Chapter 11 bankruptcy filing Sunday in the U.S. Bankruptcy Court for the District of Delaware as part of its previously announced strategic initiatives to transform to a Cetera-only independent retail business, according to a news release.

In addition to the previously announced agreement, RCS said its prearranged Chapter 11 plan reflects an agreement reached with 92.5% in principal amount of first-lien lenders and 87.6% in principal amount of second-lien lenders, as well as holders of a majority of the company’s outstanding unsecured debt, on the terms of a restructuring.

The company said the purpose of the Chapter 11 filing is to improve RCS Capital’s balance sheet and capital structure by significantly reducing its funded debt, eliminating existing equity and unsecured liabilities and disposing of some non-core assets.

Plan terms

Under the proposed plan, a creditor trust will be established for the benefit of unsecured creditors, which will be funded with a combination of cash, warrants to purchase equity in the reorganized company and specified claims and causes of action held by RCS and its subsidiaries.

In addition, unsecured debt and preferred stock totaling in excess of $1.19 billion will be discharged, and all of the existing common stock will be eliminated.

Substantially all of the equity of the company following the restructuring will be owned by the current first-lien and second-lien lenders.

RCS said the new capital structure will significantly reduce its future cash costs for principal and interest payments.

Two-wave process

According to the release, the company-wide restructuring will be completed in two waves of filings. The first wave includes a Chapter 11 bankruptcy plan and $100 million of debtor-in-possession financing and is expected to be completed in May.

The company said the first wave excludes Cetera member broker-dealer companies and registered investment advisers, which will not be included in either wave of the bankruptcy filings.

Within 60 days of the initial filing, RCS said it expects to begin a streamlined pre-packaged bankruptcy filing for the holding companies for its broker-dealers, as well as for other guarantors of the first-lien and second-lien debt.

During this second-wave filing, the broker dealer holding companies who serve as guarantors of the RCS Capital debt will utilize a pre-packaged filing in order to extinguish their guaranty. Only these guaranty claims will be impaired, and all other liabilities will be unaffected and ride through the proceeding.

Also under the second waive, Cetera payroll and benefits, vendor payables and all other liabilities at these entities, including deferred compensation plans, will continue as is and will not be impaired or modified.

Upon completion of the restructuring process, which is expected in May, Cetera Financial Group will operate as a wholly owned, privately held company of RCS Capital, the release said.

Cetera investment

In connection with the bankruptcy filing, a group of existing lenders has fully committed to invest $150 million in new working capital into Cetera Financial Group, which RCS and the Cetera senior leadership team intend to deploy to make continued significant investments in technology, adviser growth and service enhancements.

The company said the agreement includes a retention program for eligible Cetera Financial Group-affiliated advisers in the new post-bankruptcy company.

The restructuring and new investment is subject to regulatory, court and other approvals, as well as obtaining a formal vote by the requisite first-lien and second-lien lenders.

“Over the past six months, the company has taken a number of steps to streamline the business, including rationalizing its capital structure, disposing of certain non-core assets and increasing financial flexibility,” RCS chief executive officer and executive committee chairman Brad Scher said in the release.

“Taken together, these actions position the company for long-term growth. We expect the Chapter 11 process, as agreed to by our existing senior secured lenders and majority of our unsecured creditors, will provide Cetera Financial Group with a significant infusion of capital that will help stabilize our financial foundation and provide a robust basis from which we can continue executing our retail advice focused strategy.”

Cetera CEO R. Lawrence “Larry” Roth said in the release “The restructuring of the company’s balance sheet is one of the last remaining, yet critical steps in the overall repositioning of the company.

“We believe the initiatives announced today will enable Cetera Financial Group to maximize its opportunities to achieve long-term growth and success.

“The actions we have taken over the past several months, while difficult, are aligned with our goal to transform Cetera into the retail advisory platform of the future. The underlying value proposition of Cetera remains intact, as does the reason why advisers have joined, and stayed on, our platform.”

DIP financing

The company said $25 million of the proposed $100 million of DIP financing will be available on an interim basis, net of a 1% interim discount and administrative agent fees. The facility will also include a 1% final discount.

Barclays Bank plc will serve as administrative agent, collateral agent, lead arranger, bookrunner and syndication agent for the DIP facility.

Interest will be 8%, and the DIP financing will mature on the earliest of the plan effective date, the date all loans become due and payable and six months from closing.

Debt details

According to court documents, RCS had $1,975,286,000 in total assets and $1,394,490,000 in total debt as of Sept. 30.

The company’s largest unsecured creditors are:

• Wilmington Savings Fund Society, FSB of Wilmington, Del., with a $120 million unsecured notes claim;

• VEREIP Operating Partnership, LP of Phoenix, with a $15.3 million unsecured notes claim;

• Centerview Partners LLC, based in New York, with a $5.1 million service provider claim;

• Proskauer Rose LLP of New York, with a $4.04 million service provider claim;

• RSM US LLP, based in Chicago, with a $1.79 million service provider claim;

• DST Systems Inc. of Kansas City, Mo., with a $1.74 million service provider claim;

• McGladrey LLP of New York, with a $1.4 million service provider claim; and

• Cleary Gottlieb Steen and Hamilton of New York, with a $1.04 million service provider claim.

Nicholas S. Schorsch, Luxor Capital Group, LP, Luxor Management, LLC, Christian Leone and LCG Holdings, LLC each owns 10% or more of the membership interests of RCS Capital.

The company is represented by Young, Conaway, Stargatt & Taylor, LLP.

RCS Capital is a New York-based investment firm focused on the individual retail investor. The Chapter 11 case number is 16-10223.

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