Bloomberg News

MF Global May Be Cut to Junk by Moody’s as Corzine Adds Risk

October 24, 2011

(Updates shares in final paragraph.)

Oct. 24 (Bloomberg) -- MF Global Holdings Ltd. had its credit ratings cut to the lowest investment grade by Moody’s Investors Service on concern that the broker run by former New Jersey governor Jon Corzine won’t meet earnings targets and isn’t sufficiently managing risk.

Moody’s lowered MF Global’s long-term ranking to Baa3 from Baa2 and left the New York-based company on review for a further downgrade, the ratings firm said today in a statement. The “current low interest environment and volatile capital market conditions” make it unlikely MF Global can achieve targets of $200 million to $300 million in annual pretax profit, Moody’s said. The broker changed the date it will report earnings to tomorrow.

Corzine, who helped run Goldman Sachs Group Inc. from 1994 to 1999, is attempting to transform MF Global into a medium- sized investment bank and has sought to increase trading with the firm’s money and facilitate transactions for clients. Moody’s highlighted added exposure through repurchase transactions to the debt of European governments that have been among the hardest hit by the region’s sovereign debt crisis.

“MF Global’s increased exposure to European sovereign debt in peripheral countries and its need to inject capital into its broker-dealer subsidiary to rectify a regulatory capital shortfall highlights the firm’s increased risk appetite and raises questions about the firm’s risk governance,” Al Bush, a senior analyst at Moody’s, said in the statement announcing the downgrade.

European Debt Exposure

MF Global increased net capital at the U.S. unit after the Financial Industry Regulatory Authority raised concern about the European debt portfolio, it said last month. As of June 30, MF Global had exposure to about $6.4 billion of securities, net of hedging, to Italy, Spain, Belgium, Portugal and Ireland with a weighted average maturity of October 2012, according to a regulatory filing in August.

The portfolio is “sound and well structured,” MF Global said today in a statement. All of the European government securities mature by December 2012 before the expiration of the region’s rescue fund, the European Financial Stability Facility, the company said.

“We are confident that we have the resources, capital, liquidity and expertise to successfully manage our European exposures to their end date maturity of December 2012,” Diana DeSocio, a spokeswoman for the broker, said in the e-mailed statement. “The maturity characteristics, ratings profile and European support facility for lower rated credits reinforce our view that that the portfolio is sound and well-structured.”

‘Big Blow’

Being downgraded one more step to junk “would be a pretty big blow to Corzine’s goal of transitioning them into something bigger and better,” said Patrick O’Shaughnessy, an analyst with Raymond James & Associates.

While most of MF Global’s revenue still comes from acting as only a broker in trades, changes to credit ratings can affect how the firm is able to participate in swaps and repurchase transactions, the Chicago-based analyst said.

MF Global fell 3.5 percent to $3.55, the lowest level since February 2009. The shares earlier had climbed to as high as $3.77. The broker said today it would release its quarterly earnings two days ahead of schedule. They will be released tomorrow in New York instead of on Oct. 27. Analysts surveyed by Bloomberg expect the company to lose 4 cents a share.

--Editors: Pierre Paulden, Alan Goldstein

To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Matthew Leising in New York at mleising@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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