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RCAP to Wind Down Wholesale B/D

RCAP to Wind Down Wholesale B/D

Just a day after Moody’s downgraded its debt, RCS Capital said it will shut down its wholesale broker/dealer business to focus on the retail brokerage business Cetera Financial Group.

The firm also said it had settled with the Massachusetts Securities Division, which charged that employees in the wholesale brokerage unit impersonated investors in a shareholder proxy vote to support an affiliated company's efforts to sell a division to outside investors. RCS Capital, or RCAP, will pay a $3 million fine and lay off 150 employees in the unit.

“After careful consideration, the Board concluded that the wind down of the Realty Capital Securities wholesale distribution business was essential in our continuing efforts to create a leaner, more efficient organization dedicated to realizing the full earnings potential of Cetera Financial Group,” said Mark Auerbach, the company’s non-executive chairman, in a statement.

"These latest steps, which are extremely difficult but necessary, along with our recently announced capital raise, lender modifications and other initiatives, will enable us to further rationalize our business while we continue to work with Lazard to explore options to raise additional capital and complete further asset divestitures.”

Realty Capital Securities will be completely shut down by the first quarter of 2016. That means the previously announced deal with Apollo Global Management to buy the division for $6 million in cash is off. In early November, Apollo also called off the deal to purchase the asset management business of AR Capital, the real estate investment company founded by Nicholas Schorsch, whose funds were originally distributed through RCAP, also founded by Schorsch. 

Bill Dwyer, former president of LPL Financial’s independent advisor services, has served as CEO of Realty Capital since September 2014.

RCAP has been mired in turbulence since October 2014, when a publically traded real estate fund launched by AR Capital, formerly known as American Realty Capital, revealed a $23 million accounting error that was intentionally hidden. RCAP's wholesale b/d unit distributed AR Capital-sponsored REITs to advisors and brokers. 

According to RCAP's 2013 prospectus, the firm believed that "our leading position as a wholesale broker-dealer in the direct investment program industry, as well as our potential ability to grow our revenues and earnings, is due in large part to our affiliation with American Realty Capital, the leading sponsor and investment manager of direct investment programs in the United States."

AR Capital recently announced it would no longer create new products or raise capital in existing products. The firm said the move was due to regulatory and market uncertainty affecting capital raising for new and existing offerings.

RCAP’s CEO Michael Weil recently stepped down from his position, after about a year on the job. Larry Roth, head of Cetera, has replaced him and oversees the constellation of firms stitched together by real estate investor Nicholas Schorsch over the past few years. Cetera has some 9,500 brokers, the second largest independent brokerage group in the U.S.

The company’s stock is down 96 percent this year. Earlier this month, the New York Stock Exchange said it would delist RCS Capital common stock if the firm doesn't get its stock price above $1 a share in the next six months. 

On Tuesday, Moody’s Investors Service downgraded RCAP's corporate credit rating from B3 to Caa1 with a negative outlook. Moody’s cited the firm’s diminished ability to pay down its debt from ongoing activities and the risk that it may not find new investments for the change.

On news of the shut down of its wholesale brokerage division, the stock fell another 7% as of midafternoon Wednesday.

Last month, the Massachusetts securities regulator said employees of RCAP'S brokerage division "impersonated shareholders and submitted false votes" in a company meeting that was required for the Apollo transaction.

The firm has been cash-strapped. RCAP recently outlined plans to raise capital, including selling Hatteras, its liquid alternatives investment management platform, to the Hatteras Funds management group for $5.5 million and certain earn-out obligations. RCAP purchased Hatteras in the fall of 2013, under Schorsch, former head of RCAP.

The firm is also working with Lazard Freres & Co. to explore “options to raise significant capital and to rationalize the company’s capital structure,” RCAP said in a statement. The board of directors “will negotiate and approve any proposals derived from the process led by Lazard.”

The firm also issued $27 million of new senior unsecured promissory notes--$12 million to RCAP Holdings, which also owns AR Capital, and $15 million to Luxor Capital Group, of which owns a stake.

RCAP also agreed with its lenders to change its credit facilities, including the incurrence of the notes.

This article first appeared on WealthManagement.com.

TAGS: REITs News
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