RCS Capital Running Out of Cash as It Shuts Wholesale Unit: Moody’s

RCS Capital (RCAP) said early Wednesday that it is shuttering its troubled wholesale distribution unit, Realty Capital Securities, and has agreed to pay $3 million to the state of Massachusetts to settle charges tied to alleged fraudulent proxy-voting schemes.

This news follows a decision by Moody’s Investors Service on Tuesday to downgrade RCAP’s credit ratings on $750 million of debt. The downgrades reflect “RCS’ diminished ability to satisfy its debt load from its ongoing activities, and also the risk that it may not be able to attract a sufficient and timely amount of new investment that is necessary to fully protect creditors’ interests, as it seeks to recapitalize its balance sheet,” Moody’s explained in a statement.

With its stock trading around $0.50, the company is urgently trying to raise funds. Reports of about a possible sale of the Cetera Financial Group of broker-dealers emerged in October, several weeks after Apollo Global Management reneged on its plans to buy the wholesale business for $25 million and to form a joint venture with RCAP.

According to Mark Auerbach, RCAP’s non-executive chairman, the company’s latest moves are part of the firm’s “strategic plan to reposition the company as a pure-play, Cetera-only focused retail advice business.” (Cetera includes a number of broker-dealers and about 9,500 affiliated independent financial advisors.)

“These latest steps, which are extremely difficult but necessary, along with our recently announced capital raise, lender modifications and other initiatives, will enable us to further rationalize our business while we continue to work with Lazard to explore options to raise additional capital and complete further asset divestitures,” Auerbach explained in a statement.

RCAP expected to close the wholesale distribution business by March 31.

Moody’s, though, remains quite bearish on RCAP’s future.

RCS Capital “is now dependent upon the value of its independent retail advisory activities, since its investment banking and capital markets business has been further impaired by an affiliate’s recent announcement that it will cease activities in products for which RCS had earned significant advisory fees,” the credit-ratings firm says.

Cetera may be “a reasonably strong franchise, yet [it] has significantly underperformed compared to management’s expectations and is not producing sufficient cash flows to service RCS’ existing level of debt,” Moody’s explained in a statement.

The unit’s “underperformance,” it adds, “might adversely affect potential investors’ valuation of the franchise.”

Furthermore, the Department of Labor’s anticipated update of the fiduciary standard for retirement account advisors — along with low interest rates and regulatory compliance issues at RCS’ non-core operations — “could further adversely affect investors’ assessment of RCS’ value … [and] inhibit RCS’ ability to attract sufficient new investment to adequately transform its capital structure, or could prolong the decision-making process and result in RCS encountering liquidity issues,” according to a statement from Moody’s.

The credit-ratings group says that unsuccessful attempts to “timely raise significant new capital on terms that provide sufficient creditor protection” or more business weakness at Cetera could lead to further downgrades. However, RCS’ credit could be upgraded if it is able to “successfully complete its recapitalization in a manner that protects creditors’ interests and strengthens its ability to focus on improving its retail financial advisory business.”

RCS Capital has a total of $850 million in debt and $300 million in preferred equity. It bought Cetera for $1.15 billion in early 2014.

Regulatory Matters