RCS Capital announced that it has reached an agreement with the majority of its lenders to invest $150 million in new capital as part of a voluntary prepackaged bankruptcy.
The agreement, to be finalized later this month, will permit the struggling holding company to restructure its debt while it goes private. The proposed prearranged bankruptcy also contemplates eliminating the company's common and preferred shares. According to recent filings, RCS had more than $1 billion in debt and other obligations.
Cetera Financial Group, a large network of independent broker-dealers, will become the primary focus of the new entity. RCS Capital paid an estimated $1.1 billion for Cetera in 2014, according to the announcement.
The restructured entity will be led by Cetera CEO Larry Roth, who has experience in running subsidiaries of troubled parent companies. In 2008, he was CEO of the AIG Advisor Group of broker-dealers when the giant global insurance company had to be bailed out and taken over by the Federal reserve bank. RCS Capital's news release said the brokerage firms will not be directly involved in the bankruptcy.
According to Roth, the announcement "today defines the path for transforming Cetera into a private, independently run organization that is dedicated exclusively to the financial advisors and organizations we support. 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 to profitably grow its market leadership."
RCS Capital is winding down its wholesale distribution business as well as Realty Capital Securities, its investment banking and capital markets operations. It had hoped to sell this business to private-equity firm Apollo Investments but that deal fell through late last year after Massachusetts Attorney General William Galvin charged it with proxy voting fraud.
It is also selling Hatteras Funds back to its prior owners for $5.5 million.
With 9,500 financial advisors, the Cetera network is the second largest independent brokerage in the nation. In addition to four Cetera firms, the network includes First Allied Securities, Investors Capital, Legend Equities, Summit Brokerage, VSR Financial Services and Girard Securities.
The network was strung together by American Realty Capital's Nicholas Schorsch in a whirlwind series of acquisitions that began in 2013 and ended abruptly in 2014 when accounting irregularities surfaced at one of Schorsch's publicly traded entities. Since then, Scorsch and other senior executives have been forced to resign and several of the real estate businesses are being run by board-appointed executives.