2015 was a tough year for RCAP investors and Cetera

With the New Year, the management of RCS Capital (RCAP) — the beleaguered parent company of the Cetera Financial Group of independent broker-dealers — is trying to turn a page on the company’s troubles.

It did so with a bang late-Monday, announcing plans for a Chapter 11 bankruptcy filing, the injection of some $150 million from key stakeholders, as well as debt and capital restructuring plans that should allow Cetera to become an independent, privately held firm.

Shares of RCS Capital did not trade on the first trading day of 2016. They closed trading at roughly $0.30 on Dec. 31, significantly off its 2015 high of nearly $13.30, and traded under $0.03 on Tuesday.

“RCS Capital’s announcement today defines the path for transforming Cetera into a private, independently run organization that is dedicated exclusively to the financial advisors and financial institutions we support,” said Cetera CEO Larry Roth, in a statement.

There had been much industry speculation that Cetera might be sold to a private-equity group or insurance company.

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

RCAP says it intends to file a voluntary petition for a prearranged Chapter 11 bankruptcy later this month. In cooperation with its senior secured lenders, the firm plans “to pursue an expedited schedule for the company’s emergence from Chapter 11,” according to a press release. “Cetera’s member broker-dealer firms will not be involved with the contemplated Chapter 11 filing.”

Roth seemed pleased to putting the past year’s woes behind him and Cetera: “This has not always been an easy journey, and we thank the advisors and institutions we serve for the remarkable loyalty and patience they have shown to us throughout this time,” he added in a statement.

Cuts & More Cuts

As part of the plan to get rid of some non-core assets and liabilities, it expects to trim most corporate overhead expenses and other liabilities. The restructuring likely will involve the elimination of RCS Capital’s common and preferred equity.

“Other than the new proposed equity retention program for Cetera financial advisors and key employees, substantially all of the equity of the company following the restructuring will be owned by the current first- and second-lien lenders,” RCAP explained. .

Cetera’s proposed retention plan for advisors and some employees should include both cash and equity in the post-bankruptcy company. Furthermore, Cetera and RCS Capital’s lenders “have agreed in principle that the reorganization will protect the current deferred compensation arrangements,” according to the news release.

The restructuring entails more than $500 million in debt reductions and preferred-stock eliminations. The $150 million on new working capital will be used by Cetera “to make continued significant investments in technology, advisor growth and service enhancements,” according the RCS Capital, which adds that it aims to complete the restructuring and related plans in the second quarter.

“Thanks to its autonomous operating and financial structure within the RCS Capital framework, Cetera has generated sufficient capital funding and solid cash flows from our well-established broker-dealer firms,” Roth stated.

Cetera, he adds, does not anticipate that RCAP’s plans will impact existing deferred-compensation or other related compensation plans, “which are expected to remain in effect in their current form.”

RCS Capital said it is “winding down” the troubled wholesale-distribution business of Realty Capital Securities and should complete this process by the end of the first quarter. The closure of it investment banking, capital markets and related advisory services business are on a similar timetable.

2014-2015 Debacle

In late-2015, RCAP board member Edward Michael Weil resigned; earlier, he had served as CEO of the firm, as well as president, treasurer, secretary and director. In addition, he had leadership roles at American Realty Capital Properties, or ARCP, and of nontraded REITs sponsored by AR Capital.

The entwined entities — founded by real-estate mogul Nicholas Schorsch — came under intense scrutiny after ARCP reported $23 million in accounting errors in October 2014; more recently, a deal to sell some of RCS Capital’s assets fell apart when Apollo Global Management cancelled the transaction.

RCS Capital said it was shuttering its troubled wholesale distribution unit, Realty Capital Securities, and agreed to pay $3 million to the state of Massachusetts to settle charges tied to alleged fraudulent proxy-voting schemes in late-2015.

That news followed a decision by Moody’s Investors Service 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.

According to Moody’s, RCS Capital had a total of $850 million in debt and $300 million in preferred equity in 2015. It bought Cetera for $1.15 billion in early 2014.

Massachusetts’ regulators charged registered representatives of Realty Capital Securities — a broker-dealer that is part of RCAP — with impersonating shareholders and casting proxy votes in favor of management proposals at meetings of an investment program sponsored by American Realty Capital, a company owned by Nicholas Schorsch and William Kahane that manages nontraded real estate investment trusts or nontraded REITs.

— Check out RCS Capital’s Proxy Vote Scandal Ensnaring More Broker-Dealers on ThinkAdvisor.