Fitch Maintains Negative Rating Outlooks on BGC and Cantor on Announced Sale
of eSpeed Platform
NEW YORK -- April 5, 2013
Fitch Ratings has maintained the Negative Rating Outlooks on BGC Partners Inc.
(BGC) and Cantor Fitzgerald, L.P. (Cantor), while affirming their long- and
short-term Issuer Default Ratings (IDRs) at 'BBB/F2', following BGC's
announcement that it has entered into an agreement to sell its on-the-run U.S.
Treasury fully electronic trading platform (eSpeed) to NASDAQ OMX Group, Inc.
KEY RATING DRIVERS - IDRs AND SENIOR DEBT
Fitch has maintained BGC's and Cantor's Negative Rating Outlooks based on
previously-cited industry-wide challenges facing inter-dealer brokers which
included reduced trading volumes and regulatory uncertainty. Fitch believes
the eSpeed sale introduces strategic and execution risks regarding the future
direction of BGC's business and uncertainty around how the proceeds from the
sale will be deployed.
The eSpeed platform has been a significant earnings and EBITDA contributor to
BGC. The sale of eSpeed is expected to make BGC's earnings and revenue streams
more concentrated in considerably lower margin businesses such as
voice-brokered inter-dealer brokerage and commercial real estate brokerage.
Depending on how the proceeds from the sale are reinvested, this may also
reflect a material strategic shift for BGC and potential execution risk
related to the acquisition of other entities.
Although revenues from the eSpeed platform constituted less than 6% of BGC's
total revenues in 2012; on an EBITDA basis, this platform is estimated to have
contributed 32% of BGC's 2012 Fitch-calculated EBITDA of $216 million.
The sale is expected to generate $750 million in cash proceeds at closing,
although Fitch does not have significant clarity regarding the potential uses
of proceeds. The sale also provides for an earn out of up to $484 million of
NASDAQ OMX common stock to be paid ratably over 15 years, although Fitch
discounts this component of the purchase price given that the payment will be
in the form of equity as opposed to cash, and may vary depending on NASDAQ
OMX's stock price at the time of future payments.
Using proceeds from the sale to repay debt would be viewed positively by
Fitch, while shareholder friendly activities such as increased dividends or
material share repurchases would be viewed negatively.
Acquisitions could provide incremental benefit to BGC if they are
strategically sound, accretive to earnings and provide sufficient offset to
the forgone eSpeed earnings. That said, acquisitions will be viewed in the
context of their strategic fit with BGC and Cantor's other businesses, as well
as the ability for the firms' operational infrastructure to absorb such
Consistent with the broader inter-dealer brokerage industry, BGC experienced
sharp declines in EBITDA in the second half of 2012 (2H12), excluding
non-recurring gains. As a result, leverage, as measured by gross debt to
adjusted EBITDA, increased to 2.2x at year-end 2012, from 1.5x at year-end
2011. Interest coverage, as measured by adjusted EBITDA to interest expense,
declined to 6.2x in 2012, from 9.6x in 2011. Both metrics are towards the
high-end of Fitch's articulated metrics for the ratings. A sustained weakening
in these metrics, either due to prolonged industry pressures or management's
inability to execute on its strategy to improve profitability, will lead to
negative rating pressures.
RATING SENSITIVITIES - IDRS AND SENIOR DEBT
Fitch's resolution of the Negative Rating Outlook will depend on management's
use of proceeds from the announced eSpeed sale, as well as the evolution of
broader market dynamics with respect to trading volumes and regulation.
Ratings would be downgraded if proceeds are primarily used to return capital
to shareholders through dividends or share repurchases. Ratings could also be
downgraded if proceeds are used to acquire or invest in low margin businesses
without offsetting increases in profitability.
Ratings could also be downgraded if low trading volumes persist or regulatory
changes materially impact the profitability or viability of certain business
lines. Given that BGC and Cantor face both issuer-specific and industry-wide
challenges, ratings could potentially be impacted by more than one notch under
certain adverse scenarios.
Ratings could be affirmed if broader industry challenges abate, while proceeds
from the eSpeed sale are used to materially reduce debt and/or invest in
assets with similar margins or increased revenue relative to the eSpeed
In accordance with Fitch's policies, the issuer appealed and provided
additional information to Fitch that resulted in a rating action that is
different than the original rating committee outcome.
Fitch has affirmed the following ratings with a Negative Outlook:
BGC Partners Inc.
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2';
--Senior unsecured debt at 'BBB'.
Cantor Fitzgerald, L.P.
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2'
--Senior unsecured debt 'BBB'.
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
Global Financial Institutions Rating Criteria
Securities Firms Criteria
Rating FI Subsidiaries and Holding Companies
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Mohak Rao, CFA, +1-212-908-0559
Fitch Ratings, 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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