Bloomberg News

JC Flowers Fund Said to See $47.8 Million Loss on MF Global

November 02, 2011

(Adds details on Flowers’s investments in 12th-14th paragraphs. To see other news on MF Global, click {EXT3 <GO>}.)

Oct. 31 (Bloomberg) -- J. Christopher Flowers, the private- equity investor who installed Jon Corzine as the top executive at MF Global Holdings Ltd., may book a loss of $47.8 million on its investment in the New York-based broker-dealer, which filed for bankruptcy today.

JC Flowers & Co. paid $87.4 million three years ago for MF Global preferred stock with a $150 million face value, according to a person with knowledge of the deal who asked not to be named because the information is private. The investment returned $39.6 million in interest payments before MF Global sought protection from creditors.

The MF Global stake is one of several high-profile deals to go sour in JC Flowers’s second fund, which raised $7 billion in 2006. They include German lender Hypo Real Estate Holding AG and Japanese bank Shinsei Bank Ltd. The fund lost an average of 29 percent a year through June, according to returns posted on the website of Oregon’s state pension plan.

Corzine, who bought $6.3 billion in sovereign European debt in a bid to increase profits, filed for Chapter 11 bankruptcy after reporting a $191.6 million quarterly loss on Oct. 25 and Moody’s Investors Service and Fitch Ratings cut their rankings on MF Global’s debt to junk. As the common stock declined 67 percent last week, MF Global held talks with five potential buyers for all or parts of the company, said a second person, who asked not to be identified because the talks were private.

George Sard, a spokesman for Flowers, declined to comment.

Fidelity, Guardian Life

MF Global’s largest common shareholders as of Sept. 30 included Pyramis Global Advisors LLC, a unit of Boston-based Fidelity Investments, with 8.4 percent; and RS Investments in San Francisco, a unit of Guardian Life Insurance Co. of America, with 7.8 percent, according to court papers. JC Flowers’s preferred stake, if converted to common, would have equaled 6 percent.

Flowers, 54, recommended that Corzine take over as MF Global’s chairman and chief executive officer in March 2010, after the stock had fallen 76 percent since the end of 2007. At the same time, Corzine became an operating partner of JC Flowers. Corzine, 64, is entitled to profits from JC Flowers’s third fund, a $2.3 billion pool, according to regulatory filings.

Goldman Colleagues

Flowers joined Goldman in 1979 after graduating from Harvard University with a degree in applied mathematics. At Goldman he worked with Corzine, who helped run Goldman Sachs from 1994 to 1999. Flowers rose to head of the firm’s financial institutions mergers and acquisitions group and was named a general partner in 1988.

A decade later, he left after siding with Corzine in a proposal to sell shares to the public, a plan that met internal resistance and was delayed. Corzine quit the next year following Goldman’s initial public offering in May 1999.

Flowers then started his firm, and in 2000 took over near- bankrupt Long-Term Credit Bank of Japan with Ripplewood Holdings LLC founder Tim Collins. They renamed the Tokyo-based bank Shinsei before taking it public in February 2004. In all, the investors reaped about $7 billion in profit.

David Rubenstein, a co-founder of Carlyle Group, called Shinsei possibly “the most profitable private-equity deal of all time.”

Shinsei, Hypo

Flowers, who focuses on financial companies, led a group in January 2008 that bought an almost one-third stake in Shinsei for 425 yen ($3.99) a share, after the bank posted its first full-year loss since 2000. The stock is now trading at 88 yen.

In April of that year, Flowers agreed to pay 1.13 billion euros ($1.8 billion) for a 25 percent stake in Hypo Real Estate. A year later, German Chancellor Angela Merkel’s government took control of Munich-based Hypo after granting 102 billion euros of credit lines and debt guarantees to keep it from bankruptcy.

Flowers’s third fund has fared far better than its predecessor, returning an average of 30 percent a year excluding fees. Performance has been helped by deals such as its investment in OneWest Bank, the former IndyMac Bank, which a group of investors bought from regulators in January 2009.

The case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--Editors: Larry Edelman, Josh Friedman

To contact the reporter on this story: Cristina Alesci in New York at calesci2@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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