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RCS Capital Files for Bankruptcy; Cetera to Use $50M for Retention

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The parent company of the Cetera Financial Group of independent broker-dealers, RCS Capital (RCAP), filed for bankruptcy protection in Delaware on Sunday as expected, and Cetera plans to spend some $50 million on programs to retain the roughly 9,000 independent advisors affiliated with its network of  broker-dealers who are eligible for such funding, court filings show.

New York-based RCS Capital has close to $2 billion in assets and roughly $1.4 billion in debts, according to a Bloomberg report. The company’s unsecured creditors include Wilmington Savings Fund Society and Proskauer Rose LLP of New York.

In early January, RCS Capital said it had obtained $150 million to restructure its finances from a group of key investors. Also, private equity firms Carlyle Investment Management and Fortress Investment Group, along with asset manager Eaton Vance Management, are letting the company forgo debt payments. These entities are poised to see the money they are lending to Cetera turn into equity shares in the group of independent broker-dealers.

Cetera includes 10 broker-dealers, several of which carry the Cetera brand; others — such as First Allied and Investors Capital — do not.

“We are grateful to our lenders for their approval of a healthy retention program for eligible advisors and financial institutions, which demonstrates their strong support and commitment to invest in the long-term success of Cetera,” said CEO Larry Roth in a statement. ”We have worked closely with the leadership of each of the firms in our network to develop a methodology for advisors and investment programs of financial institutions to participate in our retention program, encompassing a range of qualitative and quantitative factors.”

The Cetera-branded broker-dealers are likely to offer retention deals only to reps who have $250,000 or more in average yearly fees & commissions, says Jon Henschen, a recruiter and head of Henschen & Associates. Advisors and others in the industry have said the deals will be roughly equivalent to 6% of an advisor’s trailing-12-month production level and will be paid in stock, Henschen said; these reps also will be eligible to receive another 2% of their yearly production in cash.

Advisors who serve as regional vice presidents and those leading offices of supervisory jurisdiction could receive an additional 2% of trailing-12-month production in cash, with a total maximum payout of 10% for OSJs and RVP otherwise 8%, according to Henschen.

“After what some reps went through purchasing RCAP stock … you have to wonder if owning stock will resonate [with them] vs. an only-cash offer. Offering stock at a time when profitability of BDs will be more difficult going forward vs. [the period of] pre-DOL fiduciary duty is unfortunately awkward timing,” the recruiter explained.

Cetera declined to comment at press time on such details.

“Each of our firms’ presidents will be communicating further details to eligible advisors on an individual basis over the next few weeks,” Roth explained. ”We appreciate the continued loyalty of our advisors and institutions, and we look forward to helping to grow their businesses under the fresh start we now have as a company.”

In court papers, Chief Restructuring Officer David Orlofsky said the company took on debt through “significant acquisitions” costing over $1 billion.

(In 2014, Lightyear Capital sold Cetera to RCAP’s major stakeholder at the time, Nicholas Schorsch, who — after a series of scandals at the company and other firms he founded — is no longer involved in its management.)

Securities and Exchange Commission filings stated that RCS Capital could keep the proceeds of its sale of Hatteras Funds, rather than using them to prepay loans. In addition, RCAP was required to present a retention plan for the Cetera advisors to lenders earlier this month.

RCS Capital’s bankruptcy plan includes the elimination of common and preferred equity and an equity-based retention program for Cetera financial advisors and key employees. It is assumed that after the restructuring, most equity in the firm will be owned by the current first- and second-lien lenders.

(Cetera, which includes roughly 9,000 affiliated independent advisors, declined to provide any details about the retention program.)

In addition, another Chapter 11 filing will be made — this one a prepackaged filing — likely on or before March 25, by the holding companies of Cetera Financial Group and some other BD holding companies — not the four broker-dealers which constitute Cetera — which are guarantors of RCS Capital debt.

Cetera CEO Larry Roth said in a statement that the Chapter 11 filings will “continue to advance our broader plan to become a Cetera-only, independent, well-capitalized private company, no longer burdened with legacy issues.”

— Check out RCS Capital to File for Chapter 11 Bankruptcy on Sunday on ThinkAdvisor.


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