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Portfolio > Alternative Investments > Private Equity

Moody’s Downgrades RCS Capital (Again)

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Moody’s Investors Service downgraded RCS Capital’s (RCAP) overall credit rating and the rating on two specific loans worth $600 million on Wednesday. The credit-ratings agency did keep the rating on a $150 million loan intact, but noted that its rating outlook was “developing.”

This news comes two days after the company said it planned to file for bankruptcy, had secured $150 million from key stakeholders and was restructuring its operations in order to allow the Cetera Financial Group of broker-dealers to become an independent, privately held firm.

Moody’s says the downgrades “reflect RCS’ inability to obtain significant fresh third-party capital investment to support its independent retail advisory franchise, with a resultant heightened level of uncertainty surrounding the magnitude of creditor losses.”  

In addition, “RCS’ inability to attract a third-party equity investor, after several months of effort to attract such funding, is evidence of diminished franchise value,” the agency explained in a statement.

RCAP shares traded at $0.04 late Wednesday, after trading above $13 in 2015.  

Specifically, Moody’s reduced RCS Capital’s corporate family rating to Caa3 from Caa1, while downgraded its $575 million senior secured first-lien term loan and $25 million revolving credit facility to Caa2 from Caa1. (The Ca rating on RCAP’s $150 million senior-secured second-lien term loan is unchanged.)

The agency reduced RCAP’s corporate family rating to Caa1 from B3 in December, when it also issued a negative outlook on the company’s credit.

RCS Capital “did not provide details of the amounts by which it expects its first and second lien debt to be written down as part of its restructuring, or the terms of a planned $150 million working capital investment from a group of existing lenders,” Moody’s explains in a press release issued Wednesday.

These and other details of the restructuring plans “are key to a better understanding of potential creditor losses, and are subject to negotiation and execution, since RCS expects to enter Chapter 11 in late January 2016, and to complete its restructuring during the second quarter of 2016. However, in combination with the inability to attract equity cited above, this raises the level of uncertainty with regard to creditor losses,” it added.

The Ca rating on RCS Capital’s second-lien term loan “reflects its high expected loss content, given its secondary claim upon RCS’ assets and the comparatively large size of RCS’ first lien term loan,” according to Moody’s. Furthermore, its developing outlook on RCAP’s ratings signify “a higher likelihood of a rating change in the medium term, given the fluidity of its plans and the competing priorities of its various stakeholders.”

Still, Moody’s says it could upgrade RCS Capital’s credit ratings if its final restructuring terms prove “more favorable” to its creditors in the future. Likewise, the ratings might be downgraded if the company fails in executing the restructuring plan “or the terms of the plan change in a manner that increases the likely size of losses to creditors,” the agency states.

Other Issues

Before Monday’s restructuring plans were made public, there had been much industry speculation that Cetera might be sold to a private-equity group or insurance company.

“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 earlier this week. Roth seemed pleased to putting the past year’s woes behind him and Cetera, which includes some 9,000 affiliated reps: “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.

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


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