Fitch Downgrades GFI Group Inc. to 'BB'; Outlook Revised to Negative
NEW YORK -- April 19, 2013
Fitch Ratings has downgraded GFI Group Inc.'s long-term Issuer Default Rating
(IDR) and senior unsecured debt rating to 'BB' from 'BBB-'. The short-term IDR
is also downgraded to 'B' from 'F3'. The Rating Outlook is revised to
Negative. A complete list of rating actions is at the end of this release.
KEY RATING DRIVERS - IDRs AND SENIOR DEBT
The downgrade of GFI's rating reflects a sustained decline in profitability,
increasing leverage, deteriorating interest coverage, and a weaker liquidity
profile. Ratings are supported by GFI's attractive technology platform and
recurring revenue contribution, albeit to a smaller extent, from its Trayport
and Fenics subsidiaries, which are subscription-based businesses with
predictable revenues and high operating margins.
Fitch believes that the regulatory changes in the OTC markets, the ongoing
restructuring and deleveraging in the banking sector, along with a flat yield
curve and lower overall market volatility have profoundly lowered GFI's
trading volumes. As a result, profitability and margins continue to be
pressured in the inter-dealer brokerage (IDB) industry. As the smallest of the
top five IDBs, GFI has been more susceptible to margin pressures, due to its
relatively smaller scale, lower revenue/product diversity and higher
fixed-cost base, compared to its larger IDB peers.
GFI experienced sharp declines in earnings and EBITDA, particularly in the
second half of 2012. Its GAAP net loss widened to $10.0m for 2012, from $3.2
million in 2011. Fitch-calculated EBITDA, which excludes amortization of
sign-on bonuses, declined 19% to $94.6 million in 2012, from $117 million in
2011. Subsequently, leverage measured as gross debt to adjusted EBITDA,
increased to 2.6x in 2012, from 2.1x in 2011. Interest coverage, measured as
adjusted EBITDA to interest expense, declined to 3.5x in 2012 from 4.5x in
2011. Absent an increase in EBITDA levels, interest coverage ratio is expected
to further deteriorate as the coupon on GFI's $250 million 8.375% senior notes
stepped up to 9.625%, based on interest-rate step-ups.
In addition, decline in EBITDA levels had impacted the amount GFI could borrow
under its $129.5 million bank credit facility due to a maximum leverage
covenant of 2.5x. In March 2013, GFI amended and extended the bank credit
facility to relax certain financial covenants, including increasing the
maximum leverage to 3.0x. (Leverage as per the bank covenant measured 2.1x at
Dec. 31, 2012). However, the amendment also resulted in reducing the total
capacity from $129.5 million to $75 million effective immediately and further
declining to $56.3 million in December 2013, with a final maturity in December
2015. Fitch recognizes that the increase in leverage covenant gives the
company additional flexibility but views the absolute reduction in total
capacity negatively, particularly when operating cash flows continue to be
GFI's management has responded to declining margin pressures by aggressively
rationalizing its fixed-cost base, largely through headcount reductions,
restructuring compensation agreements and reducing sign-on bonuses/guarantees.
These measures are estimated by the company to reduce costs by $50 million
compared to the 2011 expense base. Fitch believes that this is achievable
considering the company has already achieved expense reduction of $31 million
in 2012, and needs to reduce an incremental $19 million in expenses for 2013
to achieve its target. However, Fitch is concerned about the impact these
actions may have on GFI's competiveness in attracting and retaining brokers,
considering the company's smaller scale compared to its larger peers.
Despite the above mentioned challenges, the company continued to pay
approximately $6 million in quarterly dividend to its shareholders ($24
million annually). Continuation of the current dividend policy, without a
commensurate increase in earnings or cash flows, particularly in light of the
firm's reduced contingent liquidity is viewed as a credit negative.
RATING SENSITIVITIES - IDRS AND SENIOR DEBT
The revision of the Rating Outlook to Negative reflects industry-wide
pressures facing inter-dealer brokers and, in particular, GFI's sensitivity to
market conditions given its smaller scale and lack of revenue diversity. While
all IDBs face challenges with the reduced trading volume and regulatory
uncertainty, GFI's profitability is particularly challenged under these
conditions, as demonstrated by recent results. Fitch expects potentially
further profitability erosion if such conditions persist.
Ratings could be downgraded further if low trading volumes persist and the
firm is unable to stabilize earnings or regulatory changes materially impact
the profitability or viability of certain business lines. Continued
deterioration in earnings as measured by profitability and EBITDA, reduction
in interest coverage and liquidity, as well as increased leverage would also
lead to further negative ratings actions.
The Outlook could be revised to Stable if GFI is able to demonstrate a
sustained improvement to its earnings profile, reduce its cost base, and
increase liquidity, while maintaining or improving its leverage and interest
Fitch has downgraded GFI's ratings as follows:
--Long-term IDR to 'BB' from 'BBB-';
--Short-term IDR to 'B' from 'F3';
--Senior unsecured debt to 'BB' from 'BBB-'.
The Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (August 2012);
--'Securities Firms Criteria' (August 2012).
Applicable Criteria and Related Research
Global Financial Institutions Rating Criteria
Securities Firms Criteria
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Mohak Rao, CFA, +1 212-444-8102
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, +1 212-908-0549
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