Reorganization Seeks to Reposition Investment Banking Firm as Standalone Broker-Dealer Network
RCS Capital Corp., the investment banking and capital markets division of Nicholas Schorsch’s once high-flying commercial real estate empire, has filed a prearranged plan of reorganization under Chapter 11 with the U.S. Bankruptcy Court for the District of Delaware.
The filing is part of RCS Capital's previously announced plan to restructure its Cetera Financial Group into an independent broker-dealer business. R. Lawrence Roth, chief executive officer of Cetera Financial Group, called the bankruptcy filing a critical step in restructuring the company as an independent broker-deal network and retain its 9,000-plus advisors.
"These actions continue to advance our broader plan to become a Cetera-only, independent, well-capitalized, private company, no longer burdened with legacy issues, Roth said in a statement issued on the filing. "Our restructuring provides Cetera with a truly fresh start, including the additional capital to continue to invest in the best possible platforms, products and services for the financial advisors and financial institutions we support."
RCS Capital is comprised of 63 entities, of which 12 are debtors in the Ch11 petition. The company’s controlling stockholder, is controlled by Schorsch, founder, managing member, and controlling shareholder of AR Capital LLC, sponsor of a number of publicly traded- and non-traded investment REITs. Its primary REIT is VEREIT Inc. formerly known as American Realty Capital Properties Inc.
However, “the company’s principal and material value” is in its independent retail advice business conducted through a number of regulated independent broker-dealer network, according to David Orlofsky, chief restructuring officer of RCS Capital and senior managing director of Zolfo Cooper Management LLC, a leading provider of corporate advisory and restructuring services.
The relationship between RCS Capital and AR Capital REITs “can best be described as adversarial,” Orlofsky said in bankruptcy filing documents.
Background Behind Break Up
In the weeks just prior to today’s bankruptcy filing, ARC Group served RCS Capital with notice of default under a certain services agreement, under which ARC provides information technology, payroll, human resources, and facilities services to the company. The notice also said RCS is under default of sublease for its New York offices.
VEREIT also served RCS with a default notice under a $15.3 million unsecured note. RCS is disputing the validity of the defaults.
In addition, RCS ties many of its financial problems to VEREIT. In October 2014, while still known as American Realty Capital Properties, it announced that its audit committee had concluded that ARCP’s previously issued financial statements should no longer be relied upon. ARCP reported that its audit committee had concluded that certain accounting errors were made by ARCP personnel that were intentionally not corrected.
In connection with that announcement, ARCP’s chief financial officer, who also was RCS’ CFO, resigned.
RCS believes that the disclosure of the accounting irregularities resulted in a significant decline in the company’s wholesale distribution business, Orlofsky said.
Last November, the Massachusetts Securities Division filed an administrative complaint against Realty Capital Securities (RCS) one of the debtors in the bankruptcy filing alleging that it violated state law by fraudulently casting shareholder proxy votes in connection with the operation of its wholesale distribution business.
Subsequently, RCS Capital initiated shutdown of Realty Capital Securities.
That move forced AR Capital LLC, another Schorsch entity and one of the largest sponsors of non-traded REITs that has raised nearly $19 billion, through more than a dozen such investment entities, to suspend capital raising at the end of last year.
Impact On Real Estate
In its bankruptcy filing, RCS is looking to reject a number of office leases, not including the New York sublease, but one other lease in an ARC-controlled property.
Leases to be rejected include:
· 18818 Teller Ave, Irvine, CA
· 2 Kay Street, Newport, RI, an ARC property
· 5151 Beltline Road, Dallas, TX
· One Beacon Street 14th Floor, Boston MA
· 10320 Little Patuxent Parkway, Columbia, MD
· 3900 Paradise Road, Suite 156, Las Vegas, NV
· 770 Warm Springs Road, Suite 320, Las Vegas, NV
· 7025 N. Scottsdale Road, Scottsdale, AZ
· 325 N. St. Paul Street, Suite 500, Dallas, TX
· 1166 E Warner Road, Gilbert, AZ
The purpose of the Chapter 11 filing is to reduces RCS Capital’s debt, eliminate existing equity and unsecured liabilities and dispose of certain non-core assets.
Within approximately 60 days the company anticipates commencing a streamlined "pre-packaged" bankruptcy.
As a part of the balance sheet restructuring, a group of existing lenders committed to provide $150 million in new working capital to Cetera Financial Group, which Cetera senior leadership said they intend to use to invest in technology, advisor growth and service enhancements.
"Over the past six months, the company has taken a number of steps to streamline the business, including rationalizing its capital structure, disposing of certain noncore assets and increasing financial flexibility,” said Brad Scher, RCS Capital's chairman and CEO. “We expect the Chapter 11 process, as agreed to by our existing senior secured lenders and majority of our unsecured creditors, will provide Cetera Financial Group with a significant infusion of capital that will help stabilize our financial foundation and provide a robust basis from which we can continue executing our retail advice focused strategy."
Added Cetera's Roth, "The actions we have taken over the past several months, while difficult, are aligned with our goal to transform Cetera into the retail advisory platform of the future.”