Bloomberg News

Corzine’s MF Enters Distress With 17% Yields: Corporate Finance

November 02, 2011

Oct. 26 (Bloomberg) -- MF Global Holdings Ltd. bonds tumbled to levels considered “distressed” as the futures brokerage headed by former Goldman Sachs Group Inc. leader Jon Corzine struggles to transform itself into an investment bank. The firm is exploring its strategic options, including a potential sale, said a person with knowledge of the matter.

The company’s $325 million of 6.25 percent bonds, due August 2016, fell 24.8 cents yesterday. After entering distressed territory with a yield of 18 percent yesterday, they rose 2.25 cents to 66 cents on the dollar at 3:50 p.m. today in New York, leaving the yield at 17 percent, or 16 percentage points more than comparable-maturity Treasuries. The debt yielded as much as 28 percent earlier in the day.

MF Global reported its biggest quarterly loss ever yesterday after having its credit ratings cut by Moody’s Investors Service on concern that the broker won’t meet earnings targets and may not be able to manage investments in European sovereign debt.

“It’s aggregated risk,” said Richard Repetto, an analyst at Sandler O’Neill & Partners LP. The positions in Europe, the further downgrade potential and a quarterly loss combined to discourage investors yesterday, he said.

“We can’t comment on rumors or speculation,” said Diana DeSocio, a spokeswoman.

MF’s shares fell 8.6 percent, bringing their loss for the week to 54 percent.

Distressed Bonds

Moody’s lowered the long-term ranking to Baa3 from Baa2 and left MF Global on review for a further downgrade to junk status after highlighting its repurchase transactions to debt of European governments that have been hit by the region’s debt crisis. Junk bonds are rated below Baa3 by Moody’s and BBB- by Standard & Poor’s.

MF Global is rated BBB- by S&P, which put it on review for downgrade today. Vikas Jhaveri, a credit analyst, said in a statement “volatile capital markets and low interest rates will hurt the company’s ability to generate capital internally” through the fiscal year that ends in March. The review reflects possible “increased risk taking” in the transformation to an investment bank, the statement said, citing $6.3 billion of “exposure to certain European sovereign debt.”

S&P said in a report yesterday that 208 companies in the U.S. had bonds trading at spreads of at least 10 percentage points, the level considered distressed, as of Oct. 14, up from 162 in September and the most since August 2009. By dollar amount, a total of $116.8 billion of bonds were in distress, an increase from $94.5 billion in September.

Evercore Partners

Such spreads are typically found on bonds rated CCC, or the lowest rung of speculative grade, according to Bank of America Merrill Lynch index data. The firm’s index tracking debt with those ratings has an average yield of 12.73 percentage points more than Treasuries.

Evercore Partners Inc. is advising MF Global on the review of its business, said a person with knowledge of the matter, who declined to be identified because the discussions are private. The hiring of Evercore was first reported by the Wall Street Journal.

A spokesman for Evercore declined to comment.

Corzine, 64, who helped run Goldman Sachs from 1994 to 1999, is failing to convince investors that he can transform the futures broker into a Wall Street contender.

Corzine Clause

The 6.25 percent notes may pay an extra percentage point of interest if Corzine, who was governor of and U.S. Senator from New Jersey after he left Goldman Sachs, is named to a federal post and confirmed by the Senate before July 2013, MF Global said in an Aug. 9 regulatory filing. That so-called key man clause wouldn’t be triggered if the bonds were upgraded to ratings of A3 by Moody’s and A- by Standard & Poor’s.

The idea behind the clause was to alleviate concern among investors that Corzine might leave, according to a person with knowledge of the structure of the offering.

Analysts at KBW Inc., led by Niamh Alexander, wrote in a note yesterday that the Moody’s downgrade and lower earnings could cause a ripple effect on the company, raising borrowing costs and triggering collateral calls.

“It also exposes MF to collateral calls of up to $5 million,” the note said. “We believe it could also prompt lenders to reduce financing, clients to withdraw assets and trigger the need to recognize losses on certain bilateral over- the-counter and off-balance sheet transactions.”

Loss Widens

MF Global said yesterday it had a net loss of $191.6 million, or $1.16 a share, for the three months ended Sept. 30, compared with a loss of $94.3 million, or 59 cents, a year earlier. Net revenue fell 14.3 percent to $205.9 million.

The firm earns money by charging interest on client funds it holds that back futures trades. Corzine said the Federal Reserve’s target overnight interest rate, which has been between zero and 0.25 percent since late 2008, makes the futures brokerage business challenging.

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 in its Oct. 24 report.

The broker has “little principal risk” from its positions in Europe and isn’t adding to them, Corzine said on a conference call with analysts yesterday. The short-term debt positions are “my personal responsibility and a prime focus of my attention,” he said.

MF Global is lagging behind its peers in the broker-dealer community. Average yields on bonds from brokerage houses are 4.98 percent and those on all BBB rated issues are 4.46 percent, according to Bank of America Merrill Lynch Index data. MF’s shares have dropped 77 percent to $1.70 since Aug. 1, the day before the bond sale, compared with a 16 percent decline in an index of 11 securities broker-dealers.

The one thing holding the company together right now may be Corzine at the helm, Repetto said.

“If he’s gone, forget about it,” he said. “Customers flee and it’s even worse.”

--With assistance from Cristina Alesci, Mary Childs and James Sterngold in New York. Editor: Mitchell Martin

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.

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


Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus