Fitch Affirms Cantor Fitzgerald and BGC Partners at 'BBB/F2'; Outlook
Revised to Negative
NEW YORK -- January 8, 2013
Fitch Ratings has affirmed Cantor Fitzgerald, L.P.'s (Cantor) and BGC Partners
Inc.'s long- and short-term IDRs at 'BBB/F2'. The Rating Outlook is revised to
Negative from Stable.
The affirmation reflects Cantor's established position in the institutional
middle-market brokerage space, moderate risk profile due to its
distribution-based business model, controlled leverage, and good funding and
Ratings are further supported by Cantor's economic interest in BGC Partners
Inc. (BGC), which helps to diversify its revenue base.
The revision in Outlook to Negative reflects persisting headwinds facing the
industry, including low trading activity due to regulatory uncertainties,
eurozone debt concerns, sluggish U.S. recovery, and slowdown in Asia. The
Negative Outlook also reflects the challenging operating performance at
Cantor's inter-dealer broker subsidiary BGC, which has experienced significant
decline in financial brokerage-related revenues. Finally, the Negative Outlook
reflects concerns with Cantor's commercial real estate securitization
activities, which although separately capitalized and non-recourse, could
increase balance sheet risk during warehousing and contingent liquidity risk
thereafter. Fitch also notes that Cantor faces potential emerging
liquidity/refinancing risk associated with $300 million of debt coming due in
BGC's ratings are linked to Cantor's ratings, as Fitch considers BGC as a
'core' subsidiary of Cantor because of the significant interrelationship
between the two companies.
Cantor reported relatively higher revenues, pre-tax margins and earnings for
the nine months ending Sept. 30, 2012 (9M'12) compared to 9M'11, driven by
strong rebound in institutional debt business and the Cantor Commercial Real
Estate (CCRE) segment, which experienced strong earnings from increased
securitizations at tighter spreads. However, this improvement was partly
offset by continuing decline in revenues and margins in the institutional
equity business at Cantor and financial brokerage revenues at BGC for 9M'12.
At BGC, financial services brokerage revenues, which exclude real estate
brokerage, fell 20.6% and 11.9% for 3Q'12 and 9M'12, respectively, as all
financial services asset classes experienced double-digit revenue decline.
Financial brokerage revenues are being pressured by industry-wide trading
volume decline across global financial markets and low volatility experienced
in most asset classes. The decline in financial services brokerage revenues
was offset, to some extent, by increased revenues from real estate brokerage.
Still, pre-tax margins fell as compensation costs associated with real estate
brokerage expansion remained high.
Fitch believes that Cantor's institutional business and BGC's financial
brokerage business will remain challenged in the medium term because of lower
trading volume due to regulatory uncertainties and eurozone debt concerns,
lower bid-ask spreads, and the low interest rate environment. Fitch will
continue to monitor both businesses closely over the next few quarters. A
material drop in revenues combined with margin compression at these segments,
without a considerable increase in margins from other segments, could pressure
Cantor and BGC's ratings.
An important ratings consideration is whether Cantor is taking additional risk
in its business, either via secured lending (repo) or by adding leverage, to
increase profit margins. Fitch notes that Cantor's repo book continues to be
backed by high-quality liquid assets. Additionally, Cantor has managed its
balance sheet more conservatively. Leverage, both on a gross and net basis,
has declined post-crisis. Fitch expects Cantor's leverage ratios to stay low
given the uncertain economic outlook. Managing the balance sheet
conservatively and within the articulated leverage levels is the key driver of
Liquidity is managed and stressed for potential outflows in an effort to
account for highly volatile situations, using a maximum cumulative outflow
(MCO) model. The goal is to maintain liquidity, at all times, in excess of the
target reserve. In addition, a committed bank credit facility is in place to
address any funding gaps that may arise from stressed situations.
Cantor is holding an increased proportion of liquidity at its primary
regulated broker-dealer subsidiaries in the U.S. and the U.K., in light of
current volatile capital markets conditions and increased regulatory
requirements. As a result, liquidity level at the parent level has relatively
declined. Cantor does not have any senior unsecured debt maturing until 2015,
which reduces near-term refinancing risk, although Fitch will monitor Cantor's
repayment/refinancing plans with respect to outstanding debt, particularly as
it relates to available cash and earnings generation as well as balance sheet
and contingent liquidity risks associated with Cantor's commercial real estate
At BGC, leverage, measured as gross debt to trailing 12 months (TTM) adjusted
EBITDA, increased to 2.0x at Sept. 30, 2012, compared to 1.5x at year-end
2011. The increase was mainly driven by additional borrowings to finance real
estate brokerage acquisitions and decline in EBITDA levels. Interest coverage,
measured by adjusted EBITDA to interest expense, declined to 7.0x for TTM
Sept. 30, 2012 from 9.6x at year-end 2011. Fitch expects leverage and interest
coverage ratios to improve from current levels with the full integration of
the real estate brokerage acquisitions. However, absent corresponding debt
reductions, further declines in EBITDA levels could result in negative rating
Cantor has embarked on an expansion plan that entails geographical expansion
of select trading products. The plan also entails development of investment
banking, commercial real estate (origination, underwriting, and
securitization), and prime brokerage businesses. Fitch will follow Cantor as
its expansion efforts evolve, and will pay close attention to revenue
diversity, earnings generation, risk management and resource allocation
(capital, personnel, and systems). Any significant risk taking in any of these
businesses could have adverse rating implications.
A number of non-core businesses are also part of the Cantor group (e.g. Cantor
Gaming, Cantor Insurance, Cantor Index, Delivery.com) that bear little
strategic relevance to the core business. Currently, several of these non-core
businesses contribute marginally (if at all) to consolidated performance, with
measured deployment of capital to date. Consequently, these ancillary
businesses are not material ratings drivers at this juncture, although it is
important to consider the extent to which these activities consume a portion
of management's time and attention. Over time, however, one or more of these
ancillary businesses could increase financial, operational or reputational
risk to a magnitude that would result in negative rating actions. Furthermore,
Fitch would expect non-core businesses to generate positive cash flow or be
exited over the intermediate term, so as not to create a long-term drag on the
financial and human capital invested.
RATING DRIVERS AND SENSITIVITIES
The following factors may have a negative impact on ratings:
--If gross and net leverage ratios at Cantor trend materially higher than
--Evidence of increased risk appetite in the repo or securities inventory
--Significant growth, consistent operating losses leading to depletion of
capital, and/or risk management or reputation issues at the non-core ancillary
--Further deterioration in leverage and interest coverage ratios from current
levels at BGC;
--Change in regulation that materially impacts BGC's business model.
Conversely, sustained profitability in core business segments supported by
moderate risk appetite, low leverage, effective operational risk management,
and sufficient capital and liquidity levels could lead to a Stable Rating
Formed in 1945, Cantor Fitzgerald L.P. (Cantor) is one of the few remaining
private partnerships on Wall Street. Cantor operates its business
predominantly on a distribution-based brokerage model. Cantor maintains focus
on 'middle-market' clients, and offers them a marketplace for various
financial instruments. Headquartered in New York City, Cantor has over 8,000
employees located in more than 60 offices and 20 countries. Cantor is owned by
CF Group Management, Inc., the managing general partner, and several hundred
Fitch has affirmed the following ratings:
Cantor Fitzgerald, L.P.
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2'
--Senior unsecured debt 'BBB'.
BGC Partners Inc.
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2'
--Senior unsecured debt at 'BBB'.
The Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com' . The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (August 2012);
--'Securities Firms Criteria' (August 2012);
--'Rating FI Subsidiaries and Holding Companies' (August 2012).
Applicable Criteria and Related Research:
Rating FI Subsidiaries and Holding Companies
Securities Firms Criteria
Global Financial Institutions Rating Criteria
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Mohak Rao, CFA, +1-212-908-0559
Fitch, Inc., One State Street Plaza, New York, NY 10004
Nathan Flanders, +1-212-908-0827
Joo-Yung Lee, +1-212-908-0560
Brian Bertsch, New York, +1 212-908-0549
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