Cetera Finds New Independence Amid RCS Debt Deal

Among the many business units of the stressed RCS Capital Corp. is Cetera Financial Group, which provides investment and brokerage services for a significant number of U.S. retirement plan advisers.

Form 8-K SEC fillings from RCS Capital Corporation show the company has successfully negotiated an agreement to restructure as much as $500 million in debt via Chapter 11 bankruptcy.

As part of the deal, the firm says it’s also reached an agreement in principle with the majority of first- and second-lien lenders to invest another $150 million toward one of its subsidiary companies, Cetera Financial Group, which will be reestablished post-bankruptcy under a new company heading.

RCS expects the restructuring and additional investment to position Cetera for “long-term profitable growth under its existing senior management team,” which will continue to be led by R. Lawrence Roth as CEO. The filings suggest Cetera’s member broker/dealer firms “will not be involved with the contemplated Chapter 11 filing.” Further, the firm says it will implement a “retention program for Cetera Financial Group-affiliated advisers and key employees made up of cash and equity in restructured RCS Capital.”

On the downside of the debt deal, RCS Capital investors are facing the prospect of a “reduction of indebtedness and preferred stock in excess of $500 million,” highlighting the significant difficulties that have emerged for the RCS parent company in the year or so since it first scooped up Cetera in a bid to create one of the largest broker/dealer networks in existence. Followers of financial industry media will have read of the firm’s lasting difficulties in overcoming allegations of accounting malpractice that emerged shortly thereafter.

RCS Capital further announces in the 8-K filing the sale of its Hatteras business unit, “continuing progress toward sale or wind-down of remaining non-core assets.” The firm says its senior secured lenders have agreed to pursue an expedited schedule for the company’s emergence from Chapter 11.

According to the filing, “RCS Capital’s expectation is that Cetera’s current employees, advisers and trade vendors will not be affected by RCS Capital’s bankruptcy. As such, it is expected to remain business-as-usual for Cetera’s employees as well as the advisers and the institutions that Cetera supports.”

NEXT: Implications and effects downplayed 

In a statement accompanying the filing, Roth says his goal as CEO of the reemerged Cetera company will be to leverage the $150 million in new investments to enhance technology, drive ongoing adviser growth and deliver service enhancements within the Cetera platform. The filing notes Cetera and RCS Capital’s lenders “have agreed in principle that the reorganization will protect the current deferred compensation arrangements.”

The restructuring and new investment is still subject to the negotiation and execution of definitive documentation, regulatory, court and other approvals, but the firm says obtaining the approval of the requisite first- and second lien-lenders is “expected to be completed during the second quarter of 2016.” 

Roth concludes that the restructuring plan “defines the path for transforming Cetera into a private, independently run organization that is dedicated exclusively to the financial advisers and financial institutions we support. The restructuring marks a fresh start that will place the issues of the past months firmly behind Cetera, while providing the financial adviser network with the capital and operational structure to profitably grow its market leadership.

“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,” he adds. “We expect to use the anticipated $150 million of new working capital obtained through this agreement to further cement Cetera’s market position as a dynamic, forward-thinking, and adviser- and client-driven provider of investment advice to retail clients. Given this important context, we emphasize to the advisers and institutions we support that we do not expect the proposed restructuring of RCS Capital to impact the existing deferred compensation plans or other related compensation plans at Cetera, which are expected to remain in effect in their current form.”