Moody’s Downgrades RCS Capital, Cites Financial Difficulties

Moody’s Investors Service downgraded RCS Capital Corporation’s (NYSE: RCAP) ratings, including its corporate family rating that was downgraded to Caa1 from B3. The rating outlook is negative.

The rating agency’s review for downgrade was initiated earlier this month, as reported by The DI Wire.

Moody’s said that, “[RCS Capital] has suffered from a series of adverse events that have diminished its franchise value and resulted in significant and ongoing financial difficulties.” The rating agency also cited the company’s “diminished ability to satisfy its debt load from its ongoing activities, and the risk that it may not be able to attract a sufficient and timely amount of new investment that is necessary to fully protect creditors’ interests, as it seeks to recapitalize its balance sheet.”

The downgrade coincided with yesterday’s announcement that the embattled brokerage firm will begin shutting down its wholesale distribution business this week and will settle fraud charges with the state of Massachusetts for $3 million.

Moody’s also said that “RCS Capital is now dependent upon the value of its independent retail advisory activities, since its investment banking and capital markets business has been further impaired by an affiliate’s recent announcement that it will cease activities in products for which [it] had earned significant advisory fees.”

As the DI Wire recently reported, Realty Capital Securities, RCS Capital’s wholesale broker-dealer and distributor of non-traded direct investment programs, suspended dealer manager agreements with six AR Capital-sponsored offerings.

The rating agency noted that RCS Capital’s independent retail advisory business “retains a reasonably strong franchise, yet has significantly underperformed compared to management’s expectations.” Moody’s said the company “is not producing sufficient cash flows to service [its] existing level of debt.”

The agency also cited factors that could negatively impacting the company’s ability to raise new capital and could prevent investors from adequately assessing the valuation of the company. These include the uncertainty of the pending DOL fiduciary rule, prolonged low interest rates, and regulatory compliance issues at the company’s non-core operations.

Moody’s has taken the following rating actions:

Corporate family rating, downgraded to Caa1 from B3

$575 million senior secured first lien term loan, downgraded to Caa1 from B3

$25 million senior secured first lien revolving credit facility, downgraded to Caa1 from B3

$150 million senior secured second lien term loan, downgraded to Ca from Caa2

Outlook, negative

Moody’s said the Ca rating on the second lien term loan reflects its higher expected loss content given its secondary claim upon RCS Capital’s assets and the comparatively high magnitude of the company’s first lien term loan. In addition, the negative outlook reflects the heightened level of uncertainty concerning the satisfactory resolution of these matters.

Moody’s said the ratings could be upgraded if the company is successfully recapitalized in such a way that could protect creditors’ interests and strengthen its ability to focus on improving its retail financial advisory business. However, the ratings could be downgraded if the company does not raise enough capital to provide creditor protection, or if its retail financial advisory business suffers a downturn.