EXHIBIT 2 Liquidation Analysis

Transcription

1 Case MFW Doc Filed 02/09/16 Page 1 of 8 EXHIBIT 2 Liquidation Analysis

2 Case MFW Doc Filed 02/09/16 Page 2 of 8 EXHIBIT 2 LIQUIDATION ANALYSIS OF THE DEBTORS INTRODUCTION The Bankruptcy Code requires that the Bankruptcy Court find, as a condition to confirmation of the Plan, that each holder of a Claim or Equity Interest in each impaired Class: (a) has accepted the Plan of Reorganization; or (b) will receive or retain property of a value, as of the Effective Date, that is not less than the amount that such Person would receive if the Debtors were liquidated under chapter 7 of the Bankruptcy Code, a requirement commonly referred to as the best interests test. To make these findings, the Bankruptcy Court must: (1) estimate the cash proceeds that a chapter 7 trustee would generate if the Debtors Chapter 11 Case were converted to a chapter 7 case on the Assumed Effective Date (defined below) and the assets of the Debtors Estate were liquidated in a forced sale scenario; (2) determine the distribution that each impaired class would receive from the liquidation proceeds under the priority scheme dictated in chapter 7; and (3) compare the projected Liquidation Distribution to the distribution under the Plan. Note that this analysis assumes the liquidation of all Debtor entities. Liquidation Proceeds are the aggregate asset proceeds of all Debtor entities including the Debtors equity interests in nondebtor subsidiaries. Creditor Claims are the aggregate amount of Claims across all Debtor entities. Duplicate claims arising from the same liability have been eliminated. To assist the Bankruptcy Court in making the findings required under section 1129(a)(7) of the Bankruptcy Code, the Debtors management, together with Zolfo Cooper, the Debtors restructuring advisor, prepared this Liquidation Analysis. The Liquidation Analysis presents both Low and High estimates of Liquidation Proceeds representing a range of management s assumptions relating to the costs incurred during the liquidation and the proceeds realized. It is assumed that the Debtors would cease operations immediately, or shortly after the appointment of a chapter 7 trustee and the proceeds represent value to be obtained in a forced sale of the assets. The projected date of conversion to a hypothetical chapter 7 liquidation (the Effective Date ) is May 15, Recoveries to creditors are presented on an undiscounted basis. For purposes of the analysis, estimated asset balances as of December 31, 2015 with certain proforma adjustments were used to estimate recoveries. There can be no assurance that the liquidation would be completed in a limited time frame, nor is there any assurance that the recoveries assigned to the assets would in fact be realized. Under Section 704 of the Bankruptcy Code, an appointed trustee must, among other duties, collect and convert the property of the estate as expeditiously (generally at distressed prices) as is compatible with the best interests of the parties-in-interest. The Debtors largest asset is their investment in subsidiaries which own and operate the Independent Retail Advice business conducted through a number of regulated independent broker-dealers (collectively, the BDs ), and Registered Investment Advisors (the RIAs ). The liquidation analysis assumes that there would be significant and material impairment to the value of these assets as more fully described in Note 8. 1

3 Case MFW Doc Filed 02/09/16 Page 3 of 8 The Debtors cost of liquidation under Chapter 7 would include fees payable to a Chapter 7 trustee, as well as those which might be payable to attorneys and other professionals that such a trustee may engage. Further, costs of liquidation would include any obligations and unpaid expenses incurred by the Debtors until conclusion of the Chapter 7 case. It is possible that in a Chapter 7 case, the wind-down expenses may be greater or less than the estimated amount. Such expenses are in part dependent on the length of time of the liquidation. Under the absolute priority rule, no junior creditor would receive any distribution until all senior creditors are paid in full. The Debtors believe that in the Chapter 7 case, general unsecured creditors of the Debtors will likely receive no recovery. For purposes of the Liquidation Analysis, the Debtors estimates of allowed claims contained in the Liquidation Analysis references specific claims estimates, even though the Debtors estimates of projected recoveries under the Plan to holders of allowed claims are based on ranges of allowed claims. Therefore, the Debtors estimate of allowed claims set forth in the Liquidation Analysis should not be relied on for any other purpose, including determining the value of any distribution to be made on account of allowed claims and equity interests under the Plan. NOTHING CONTAINED IN THE LIQUIDATION ANALYSIS IS INTENDED TO BE OR CONSTITUTES A CONCESSION OR ADMISSION OF THE DEBTORS. THE ACTUAL AMOUNT OF ALLOWED CLAIMS IN THE CHAPTER 11 CASES COULD MATERIALLY DIFFER FROM THE ESTIMATED AMOUNTS SET FORTH IN THE LIQUIDATION ANALYSIS. THE DEBTORS LIQUIDATION ANALYSIS IS AN ESTIMATE OF THE PROCEEDS THAT MAY BE GENERATED AS A RESULT OF A HYPOTHETICAL CHAPTER 7 LIQUIDATION OF THE ASSETS OF THE DEBTORS. The Liquidation Analysis is based on numerous estimates and assumptions that, although developed and considered reasonable by the Debtors, are inherently subject to significant business, economic, regulatory and competitive uncertainties and contingencies beyond the control of the Debtors and their management and advisors. Inevitably, some assumptions will not materialize and unanticipated events and circumstances may affect the results of a chapter 7 liquidation of the Debtors. Accordingly, the values reflected might not be realized if the Debtors were, in fact, to be liquidated under chapter 7. Accordingly, while the information contained in the Liquidation Analysis is necessarily presented with numerical specificity, the Debtors cannot assure you that the values assumed would be realized or the Claims levels assumed would not change if the liquidating Debtors were in fact liquidated, nor can assurance be made that the Bankruptcy Court would accept this analysis or concur with these assumptions in making its determination under section 1129(a) of the Bankruptcy Code. All holders of Claims that are entitled to vote to accept or reject the Plan are urged to examine carefully all of the assumptions on which the Liquidation Analysis is based in connection with their evaluation of the Plan. 2

4 Case MFW Doc Filed 02/09/16 Page 4 of 8 DETAILED LIQUIDATION ANALYSIS The following table provides detailed calculations of recoveries under a chapter 7 liquidation and should be read in conjunction with the accompanying notes. 3

5 Case MFW Doc Filed 02/09/16 Page 5 of 8 Estimated Book values Liquidation Proceeds ($mm's) at 5/15/2016 LOW HIGH LOW HIGH Cash and Cash Equivalents % 100.0% Securities Available for Sale % 60.0% Receivables % 16.3% Prepaid Expenses % 0.0% Property and Equipment % 0.0% Deferred Assets % 0.0% Notes Receivable % 0.0% Investment in Subsidiaries 1 1, % 26.9% Other Assets % 13.8% Estimated Gross Liquidation Proceeds $ 1,261.8 $ $ % 26.8% Less Cost of Wind-Down Wind-down Costs (5.0) (5.0) Chapter 7 Trustee Fees (6.3) (10.1) Chapter 7 Professional Fees (12.7) (12.7) Estimated Proceeds Available for Creditors $ $ Claim Low High Low High Est. Proceeds Available For DIP Claims & Administrative Claims DIP Claims % 100.0% Professional Fees Claims % 100.0% General Administrative Claims % 100.0% Est. Proceeds Available For Priority Unsecured Claims Priority Tax Claims % 100.0% Priority Claims % 100.0% Est. Proceeds Available For 1st Lien Claims st Lien Claims % 35.6% Est. Proceeds Available For 2nd lien Claims - - 2nd Lien Claims % 0.0% Est. Proceeds Available For Other Secured Claims RECOVERY ANALYSIS Other Secured Claims % 0.0% Est. proceeds available For Unsecured Claims - - RECOVERY % Recovery Recovery % General Unsecured Claims % 0.0% Convenience Class Claims n/a % 0.0% Subordinated Claims n/a % 0.0% Intercompany Claims n/a % 0.0% Intercompany Interests n/a % 0.0% Holdings Equity Interests n/a % 0.0% Note (1) The Debtors' record investments in subsidiaries at historical values.thebook value shown is as per the RCS Capital Corporation, Inc balance sheet at December 31,

6 Case MFW Doc Filed 02/09/16 Page 6 of 8 NOTES TO DETAILED LIQUIDATION ANALYSIS 1. Cash and cash equivalents The estimated cash balance as of May 15, 2016 is $32.0 million. Cash consists of all unrestricted cash in banks or operating accounts of the Debtors. Cash is assumed to be fully recoverable; however cash recovered may be materially different if financial institutions have rights of off-set against cash. 2. Available for sale securities The available for sale securities relate to a majority owned mutual fund. It not a liquid fund and only has quarterly tenders up to 5% of the fund assets. The investment may be able to be sold at a discount to accelerate recovery. 3. Accounts Receivable The majority of the accounts receivable relate to intercompany receivables (~$49.0 million). Intercompany receivables have been reviewed on an entity by entity basis to determine likelihood of recoverability. All receivables due amongst debtor entities are assumed to be non-recoverable. Intercompany receivables from non-debtor entities from the non-debtor entities are assumed to be recovered at 100% under the high case and 50% for the low case. Reimbursable expense receivables of $8.9 million are due from related entities that may claim a right of offset, as such these balances are not assumed to be recoverable other than with regard to a $0.5 million receivable at SK Research which is assumed to be partially recoverable. Accounts receivables due from non-related third parties are assumed to be at 50% under the high case and 25% for the low case. 4. Prepaid Expenses Prepaid expenses consist primarily of deposits to landlords (leases for the majority of premises have been rejected), prepaid insurance and retainers prepaid to professionals relating to the restructuring. Prepaid expenses are assumed to have no recovery. 5. Property and Equipment Property and equipment consist of furniture and related equipment. Estimated recovery values in a liquidation scenario are expected to be zero as the leases are assumed to be rejected and the property abandoned. 6. Deferred assets Deferred assets are primarily comprised of deferred income tax asset ($29.5 million) and capitalized financing fees ($33.2 million). No realizable value is assumed for deferred assets on liquidation. 5

7 Case MFW Doc Filed 02/09/16 Page 7 of 8 7. Notes receivable Notes receivable relates to a note issued by JP Turner & Co Capital Management ( JPT ) to RCS Capital Corporation for the purpose of providing advisor retention loans to JPT advisors. The loans to advisors are also assets of JPT for the amount of $1.5 million. No recoveries are expected as these are forgivable notes issued to advisors. 8. Investment in subsidiaries The largest asset of the debtors is their investment in subsidiaries with the principal and material value being in the Independent Retail Advice business conducted through a number of regulated independent broker-dealers (collectively, the BDs ), certain subsidiaries that are acting as registered investment advisors to retail investors under the Investment Advisers Act of 1940 (collectively, the RIAs ), and certain of the BDs direct and indirect holding companies (collectively, the BD HoldCos ). The Independent Retail Advice business is conducted through a network of independent financial advisors that are free to move their business to competing broker-dealers on short notice. Even though the registered BDs and RIAs are not debtors in these cases, however, their mere association with the Debtors carries significant risks. Significant attrition in the Company s financial advisor network, and the attendant loss of customers, would result in a material erosion of the Company s enterprise value. Moreover, the viability of the Company s businesses depends upon the Company s counterparties and clearinghouses continuing to do business with the Company and the regulated subsidiaries ability to maintain compliance with their regulatory requirements. In a liquidation scenario, in light of the foregoing, the Debtors believe that the Independent Retail Advice business would suffer a significant decline in realizable enterprise value. In a liquidation scenario, the Independent Retail Advice businesses are assumed to be sold as going concerns either as a group or on a piecemeal basis at distressed prices. The assumed sale proceeds reflect the potential adverse impact of the Debtor s liquidation on the Independent Retail Advice business, particularly with regard to advisor retention, assets under management and retention of key management and employees. The recoverable value of the Company s investment in subsidiaries has been estimated to take into account the above and a sale of the Independent Retail Advice business is assumed to occur within a day period. The high and low recoveries are after costs associated with the sale of businesses is paid. 9. Other assets Other assets primarily include State and Federal taxes receivables of which $1.6 million is expected to be received by way of a tax refund. An additional $0.1 million relates to a clearing deposit that is expected to be recovered in full. 6

8 Case MFW Doc Filed 02/09/16 Page 8 of Wind-Down Costs To maximize recoveries on remaining assets, minimize the amount of Claims, and generally ensure an orderly liquidation, the chapter 7 trustee will need to retain a number of individuals currently employed by the Debtors during the chapter 7 liquidation process. These individuals will primarily be responsible for maintaining the Debtors assets, providing historical knowledge and insight to the chapter 7 trustee regarding the Debtors businesses, and concluding the administrative wind-down of the business. Wind-down costs also include other expenses required to manage the liquidation including ongoing operating expenses consisting of corporate overhead and occupancy costs to be incurred during the Chapter 7 liquidation period. The Debtors assume that the liquidation would occur over a three-month period and that such expenses, costs and overhead would decrease over time. 11. Chapter 7 Trustee Fees It is assumed that the chapter 7 trustee fees are paid in accordance with limits established by section 326 of the Bankruptcy Code. Fees are estimated to be 3% of the proceeds to be distributed to creditors. 12. Chapter 7 Professional Fees Professional fees include the cost of attorneys, accountants and other professionals retained by the chapter 7 trustee. Professional fees are based on historical monthly average run rates and stepped down over the course of three months as operations are wound down and distributions are made. 7