Tags: MF | Global | Credit | Junk

MF Global Draws Down on Credit Lines as Moody’s Cuts to Junk

Friday, 28 Oct 2011 09:46 AM

 

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MF Global Holdings Ltd., the futures broker run by Jon Corzine, drew down on its revolving credit lines this week as the firm reported its biggest quarterly loss and had its ratings cut to junk by Moody’s Investors Service and Fitch Ratings.

The company tapped the entirety of two bank lines, said three people with knowledge of the matter, speaking on condition of anonymity because the move wasn’t disclosed. New York-based MF Global said in an Oct. 25 investor presentation that it had $1.3 billion in unused credit facilities, without giving a date for the tally.

MF Global declined 61 percent this week and its 6.25 percent bonds issued in August are trading at distressed levels as the firm seeks a buyer for its futures brokerage to raise capital. In its second downgrade this week of the firm, Moody’s said “weak core profitability” drove the broker to increase risk buying European sovereign debt.

“When things start to go bad it tends to spiral down fairly quickly,” said Craig Pirrong, a finance professor at the University of Houston. Drawing on the credit lines “is another indication of the financial stress they’re undergoing,” he said.

MF Global’s lenders include Citigroup Inc., Bank of America Corp., and JPMorgan Chase & Co., according to data compiled by Bloomberg. Spokesmen for the banks and MF Global’s Jeremy Skule, declined to comment.

The credit lines consist of a $511 million portion that matures in June 2012 and a $690 million revolver coming due two years later, Bloomberg data show. MF Global had used about $192 million on the lines by Sept. 30. In a revolving credit facility, money can be borrowed again once it’s repaid.

Moody’s Downgrade

It also has a $300 million revolving credit line maturing in June for its U.S. broker dealer and as much as $200 million in letters of credit and bank overdrafts, according to the company.

Moody’s downgraded the company on Oct. 24 one level to Baa3 citing its struggles to earn a profit, increased risk appetite and low interest rates. MF Global said the next day it had a net loss of $191.6 million for the quarter.

The ratings firm reduced MF Global two more steps yesterday to Ba2 and put it under review for more possible cuts, according to a statement.

That followed Fitch, which reduced the grade to BB+, the highest junk rating, from BBB. Fitch cited increased trading with its own capital and the challenges of earning profits from interest in the current “low interest rate environment.” The Federal Reserve target on overnight loans has been between zero and 0.25 percent since late 2008. Standard & Poor’s grades the company BBB-, the lowest investment-grade.

Interest Income

MF Global’s futures unit earns interest income from the collateral it holds to back its customers’ trades. It earned $113.2 million in interest income in the quarter ended in September. When rates were at 5.25 percent in 2007, the company earned $1.77 billion in the quarter ended in March.

Corzine, the former co-chief executive officer of Goldman Sachs Group Inc., began adding sovereign debt about a year ago, according to a company presentation. The positions accounted for 16 percent and 12 percent of net revenue in the quarters ended in March and June, MF Global said.

The firm, which has a market value of $235.8 million, holds $6.3 billion of sovereign debt from Italy, Spain, Belgium, Portugal and Ireland that it’s using in repurchase agreement trades with customers.

‘Outsized Proprietary Position’

“The tactical decision to assume this outsized proprietary position highlights the core profitability challenges faced by MF Global and the scope of the re-engineering challenge facing the firm’s management,” Al Bush, a Moody’s analyst wrote in yesterday’s report.

In a regulatory filing last month, MF Global said the Financial Industry Regulatory Authority required the firm to boost capital in its U.S. unit because of the repurchase transactions.

The repurchase transactions are financed to maturity and don’t need to be re-funded on an ongoing basis, Diana DeSocio, a spokeswoman for MF Global, said this week.

MF Global’s bonds plunged even as Europe’s leaders made progress in stemming the region’s debt crisis. Its $325 million of 6.25 percent bonds due August 2016 reached distressed levels on Oct. 25, according to Trace, Finra’s bond-price reporting system. The debentures, which traded as low as 44.5 cents on the dollar on Oct. 26, rebounded to 61.9 cents to yield 18.7 percent, or 17.5 percentage points over Treasuries. Spreads of more than 10 percentage points are considered distressed.

Evercore Advice

Its shares, which rose as high as $9.76 in April 2010 as Corzine said that the firm’s move toward trading directly with clients was becoming more certain, reached $1.07 on Oct. 26 and closed yesterday at $1.43.

MF Global is getting advice from Evercore Partners Inc. as it seeks buyers for the brokerage unit and examines other options. It’s been contacting large banks, including some that are already in the futures business, said two people with knowledge of the situation, who spoke on condition of anonymity because the talks are private. Under the plan being discussed, the firm’s holding company and other businesses wouldn’t be included in the sale, the people said.

“Time is of the essence in order to maximize value for MF stakeholders,” Niamh Alexander, an analyst at KBW Inc. in New York, wrote in a note to clients yesterday. “We’re thinking days not weeks.”

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