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MF Global Reviewing Strategic Options - WSJ

Wednesday, 26 Oct 2011 05:32 PM

 

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Futures brokerage MF Global Holdings Ltd has hired at least two investment banks to review its strategic options -- including a possible sale of the company -- after its stock price plummeted this week, The Wall Street Journal reported.

The brokerage has hired Evercore Partners and at least one other bank, the Journal said, citing a source familiar with the matter.

Former Goldman Sachs executive Jon Corzine has been reshaping MF Global into a commodities-based investment bank, taking steps such as ramping up trading risk. But in just three days, the company has shed more than half of its market capitalization, casting serious doubt on Corzine's vision.

Moody's Investors Service cut the company's debt ratings to a step above junk Monday, citing concerns about MF Global's European sovereign debt holdings. Standard & Poor's said Wednesday it might cut the New York-based company's counterparty credit rating to junk.

"We'll probably end up pulling our accounts," said a fund manager with $800 million in assets under management and about $200 million at MF Global.

"If they lose a lot of accounts, they lose brokers and we need something more stable. We have no reason to believe any of our accounts are encumbered, but when there's a loss of that confidence they can't replicate business anymore."

MF Global's troubles began boiling over in August, when the Financial Industry Regulatory Authority ordered it to boost capital levels due to the U.S. subsidiary's European debt exposure.

The company posted a $191.6 million shareholder loss Tuesday, in part because it scaled back its risk taking as markets tanked.

Since Monday morning, MF Global's shares have fallen 54 percent, including a 8.6 percent drop to close at $1.70 Wednesday on the New York Stock Exchange.

MF Global's board voted this morning to review alternatives that could include asset sales, a merger or selling the entire business, the newspaper said.

A spokeswoman for MF Global and a spokesman for Evercore Partners declined to comment.

MF Global would possibly join Newedge, a big futures and clearing brokerage, on the selling block. A source told Reuters last month that Societe Generalehad put its stake in Newedge up for sale. The French bank co-owns Newedge with Credit Agricole.

But businesses diverge at the two brokers.

Newedge in August was the second-biggest Futures Commission Merchant, by customer funds, with $22.3 billion, according to U.S. government data. MF Global was eighth with $7.3 billion. And unlike Newedge, MF Global has increasingly relied on proprietary trading and research.

Corzine, 64, joined MF Global in 2010 with the aim of turning around the ailing broker after he lost his reelection bid as governor of New Jersey.

 

SPUN OFF, THEN PROBLEMS

MF Global was spun off from former parent Man Group Plc in 2007 in a $3 billion initial public offering, one of the largest that year.

But problems soon emerged.

In 2008, the company revealed a broker's trades resulted in a $141.5 million loss on wheat futures in a six-to-seven hour period. Investor lawsuits ensued.

MF Global, its former parent and three dozen underwriters agreed in August to pay $90 million to settle the suit, which alleged the company misled investors about its risk management.

Corzine pushed to turn the company into a commodities and capital markets focused investment bank, modeled after Goldman Sachs, where he was chief executive in the late 1990s.

MF Global became a primary dealer in February, authorizing the company to deal directly with the government in selling U.S. debt and to trade directly with the Federal Reserve Bank of New York for monetary policy.

That same month, Corzine said in MF Global's quarterly earnings announcement that the shift to being a capital markets investment bank could "fundamentally change our growth trajectory and profitability profile" by delivering more services to clients.

"I believe our new model will create a growing and diversified revenue base, which will allow MF Global to deliver stable, double-digit returns to shareholders," Corzine said in the company's earnings release on Feb. 3, 2011.

But the change has yet to translate into earnings. Through the first six months of the company's latest fiscal year, MF Global has posted a net loss of $183 million, or $1.11 per share. As of Sept. 30, the company's net worth as measured by its book equity was $1.23 billion.

In a letter to clients Monday, MF Global said that, while it was "disappointed" Moody's cut its rating, "we believe that it bears no implications for our clients or the strategic direction of MF Global.

"MF Global's financial position is strong," it added in the letter signed by CFO Henri Steenkamp, and obtained by Reuters. "The firm remains a well-capitalized counterparty with a strong liquidity position."

Corzine is viewed by the company as critical to overall operations. In August, an MF Global bond issuance included an unusual provision that investors would receive an extra percentage point of interest if he was named to a government post by a U.S. president by July 1, 2013.

MF Global also disclosed it had bet $6.3 billion -- more than 10 percent of its total assets -- on an optimistic view of European sovereign debt.

© 2014 Thomson/Reuters. All rights reserved.

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