The Wall Street Journal
written by Aaron Lucchutti and Jacob Bunge
Thursday October 27, 2011
The crisis at MF Global Holdings Ltd. deepened Wednesday, as the trading firm, reeling from exposure to European sovereign debt, hired bankers to explore a possible sale and scrambled to shore up confidence among customers.
The decision Wednesday by MF Global's board came as the New York company has been rattled by more than a week of bad news. MF Global's shares have plummeted 57% in the past eight trading days, while yields on its bonds have soared to distressed levels. On Monday, Moody's Investors Service cut its debt rating to one notch above "junk" status.
MF Global declined to comment on the hiring of Evercore Partners Inc. and another adviser, whose identity couldn't be determined. The move doesn't necessarily mean the company will sell itself. MF Global also could look for buyers who would be interested in parts of the company. But analysts said a corporate breakup is likely given the recent problems.
MF Global's shares plunged as much as 40% on Wednesday after The Wall Street Journal reported the investment-banker hiring. The shares later recovered but closed down 16 cents, or 8.6%, to $1.70, in 4 p.m. New York Stock Exchange composite trading, after closing down 48% on Tuesday.
Some investors saw the board's move as a sign of desperation and a no-confidence vote in Jon Corzine, the former Goldman Sachs Group Inc. executive and New Jersey [DEMOCRAT (emphasis mine)] governor who took over as MF Global's chief executive in March 2010.
The turmoil is largely the result of a push by Mr. Corzine to make the brokerage into more of a trading house that makes bets with its own capital. The company, spun off from hedge-fund operator Man Group PLC in 2007, is best known as a broker for futures and commodities trading. MF Global is a big player in the business of clearing derivatives trades made on exchanges, and its clients include individual investors and commodities producers.
Last year, MF Global began taking positions in sovereign bonds in Europe. Mr. Corzine oversaw the trades and launched the trading desk that put them on, a person familiar with the company said. The trades were short- and medium-term bets on debt issued by Italy, Ireland, Portugal, Spain and Belgium.
The bets began in the second half of 2010 and increased during the first half of 2011 under a new trading chief hired by Mr. Corzine in February, this person said. On Tuesday, MF Global said the positions add up to a net exposure of $6.3 billion. About two-thirds of the total is related to sovereign debt of Italy and Spain. Mr. Corzine couldn't be reached to comment.
In comparison, Morgan Stanley has roughly $4 billion in net exposure to debt issued by the same countries and nearly 50 times as much cash and liquidity as MF Global as of Sept. 30.
MF Global's exposure started drawing more scrutiny from regulators and investors as Europe's financial crisis deepened. In August, the Financial Industry Regulatory Authority asked the company to bolster its U.S. brokerage unit's regulatory capital, citing the greater risks being taken by MF Global with its own money.
After the company reported on Tuesday a wider fiscal second-quarter loss of $186.6 million, Mr. Corzine defended the firm's bets on Europe, saying they represented "attractive" spreads, or yields, versus other debt instruments. He added that the maturities on the various debt, mainly 2011 and 2012, were short enough to keep MF Global from having problems getting paid back. Mr. Corzine said MF Global wouldn't increase the size of its bets on European sovereign debt.
Both private-equity firm J.C. Flowers & Co. and Mr. Corzine own stakes in MF Global and stand to lose if the company's shares continue their decline. But if MF Global is sold and Mr. Corzine departs, he could collect an estimated $12.1 million in severance pay, bonuses and other benefits, according to a recent MF Global filing.
On Wednesday, Standard & Poor's Ratings Services put MF Global's credit rating on watch for possible downgrade.
"We consider this exposure [to European sovereign debt] to be very high, compared to the company's loss absorbing capital base," analysts at S&P wrote. The $6.3 billion in exposure is equivalent to about 5.2 times the company's total equity, S&P said.
As MF Global shares sank Wednesday, customers dialed contacts at the firm. Some employees sent résumés to other trading firms. One oil-market trader said his firm got requests to be ready to take over trades in which MF Global is the broker, a backup plan if the company's troubles worsen.
"The level of concern is not extreme, but it's not zero, either," the trader said.
CME Group Inc., IntercontinentalExchange Inc. and NYSE Euronext, which collect trading collateral from member firms such as MF Global to ensure any customer losses can be adequately covered, said the company remained a member in good standing as of Wednesday morning.
MF Global has been working behind the scenes to reassure customers. Those efforts include several notes to clients. "MF Global's financial position is strong and the firm remains a well-capitalized counterparty with a strong liquidity position," Henri Steenkamp, MF Global's chief financial officer, wrote Monday.
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