Fitch Downgrades Three IDBs due to Earnings Pressure & Regulatory Uncertainties

  Fitch Downgrades Three IDBs due to Earnings Pressure & Regulatory
  Uncertainties

Business Wire

NEW YORK -- June 28, 2013

Fitch Ratings has downgraded the ratings of three inter-dealer brokers (IDBs)
including the following:

ICAP plc (ICAP)

ICAP Group Holdings plc (IGHP)

--Long-term Issuer Default Rating (IDR) to 'BBB' from 'BBB+';

--Senior debt to 'BBB' from 'BBB+'.

Tullett Prebon plc (Tullett)

--IDR to 'BBB-' from 'BBB'.

BGC Partners Inc. (BGC)

--IDR to 'BBB-' from 'BBB'.

The Rating Outlooks for ICAP, Tullett, and BGC's are Stable.

Fitch has affirmed GFI Group, Inc.'s (GFI) long-term IDR has at 'BB', and its
Outlook remains Negative.

A full list of rating actions follows at the end of this press release.

The downgrades of ICAP, Tullett and BGC reflect the persistently challenging
operating and earnings environment for IDBs, which are driven mainly by
revenues pressures and, to a certain extent, operating leverage in voice
broking activities. This results in weaker earnings, margin pressure, and
varying degrees of increases in gross leverage metrics. EBITDA and earnings
volatility has been greater than previously anticipated. Fitch considers some
of the earnings challenges to be due to structural factors such as regulatory
changes, as well as due to cyclical factors such as a flat yield curve.

Proposed regulatory changes could increase the competition that IDBs face on
certain products that could be traded over exchanges, increase costs in terms
of trade reporting, compliance and risk management, and may potentially shrink
their revenue base by restricting activities of global banking institutions,
which are the primary clients of IDBs.

All IDBs have responded to revenue pressures by looking to reduce costs,
including renegotiating their compensation expense, which has been the biggest
expense contributor. However, there has been an increase in core gross
leverage metrics - to varying degrees - due to weaker EBITDA and, for BGC,
higher gross debt. IDBs must continue to incur technology and development
costs and invest in their business to align themselves with the industry
developments, for example more electronic/hybrid trading.

The Outlooks are Stable for all but GFI, which is further challenged by its
smaller size and limited scale and revenue diversity. The Stable Outlooks on
ICAP, Tullett and BGC reflect Fitch's expectation that revenues will remain
pressured but not to the same magnitude as experienced in 2012, (for ICAP,
FY13), and that management's efforts to streamline their compensation expense
bases and reduce debt levels will help stabilize profit margins and stabilize
or improve leverage and interest coverage.

Company-specific rating drivers are discussed below.

ICAP plc

KEY RATING DRIVERS

Fitch has downgraded the IDR and senior debt rating of ICAP and IGHP to 'BBB'
from 'BBB+'. Despite ICAP having a more diversified strategy than other IDBs,
with two-thirds of its operating profit coming from electronic and post-trade
and information, revenues fell by 12% year on year at FY13 with statutory
operating profit falling 61% and EBITDA falling by 21% (or 18% adjusting for
LIBOR-related legal costs). Management cost exercises and stable revenues in
the post-trade and information sector helped mitigate the decline, but Fitch
still considers EBITDA and earnings volatility to be greater than previously
anticipated. In addition, ICAP faces increased legal costs, possible
fines/litigation and heightened reputation risk arising from investigations
into its potential involvement in the LIBOR scandal.

Due to earnings pressure across all broking product areas and a lag in a
material rebasing of compensation levels, leverage and interest coverage
ratios deteriorated moderately in FY13, with leverage (measured as Gross Debt
to Adjusted EBITDA) calculated by Fitch to be 1.7x (or 1.6x adding back
LIBOR-related legal costs), up from 1.4x at FY12. Ratios remain comfortably
below ICAP's leverage covenant of 3.0x gross debt/EBITDA and above the
interest coverage covenant of 5.0x. Despite an improvement in H213, Fitch
anticipates that the margin pressure in voice broking will continue in the
short to medium term relative to previous years as revenue will continue to be
pressured and renegotiations of the cost base will take time to come through.

In Fitch's opinion ICAP's diversification strategy means it is relatively
better placed to face regulatory/market uncertainties than other IDBs, despite
potential challenges related to expansion, as emphasised for example by the
FY12 and FY13 goodwill impairments of the voice broking business, Link.

Fitch considers ICAP's refinancing risk as low and liquidity is supported by
the June 2013 refinancing of its USD880 million unsecured revolving credit
facility (RCF) with a three-year GBP425 million RCF, incorporating a USD200
million swingline facility. Credit and market risks in its IDB businesses are
also considered low because of the name give up or matched principal
conventions employed.

IGHP is a fully controlled, non-operating subsidiary of ICAP and the obligor
of the group's bank facilities, loans and debt, with the exception of the
group's subordinated debt, retail bond and European Commercial Paper. IGHP is
covenanted to consolidate at least 85% of the group's EBITDA, supporting the
alignment of its ratings with ICAP.

RATING SENSITIVITIES - IDRS AND SENIOR DEBT

The Outlook is Stable, for the reasons cited earlier. However, Fitch notes
that should regulatory developments be significantly detrimental to its
business model or if EBITDA performance is materially worse than FY13, leading
to further weakening in core leverage metrics, the Outlook may be revised to
Negative and/or downgraded. Large LIBOR-related payments, should they
materialise, could also place pressure on ratings.

Nonetheless, should regulation end up opening further opportunities and a
larger customer base as well as creating a more simplified and liquid market
for certain products, then Fitch would view this as a positive to the ratings.

Tullett Prebon plc

KEY RATING DRIVERS

Fitch downgraded the IDR and senior debt rating of Tullett to 'BBB-' from
'BBB' for the reasons outlined earlier in this rating action commentary.
Tullett is the second-largest IDB, focused mainly on foreign exchange,
interest rate derivatives, government and corporate bonds.

Despite being more focused on voice/hybrid broking, which has been the area
under greater margin compression across the sector, revenues were relatively
more resilient than peers', down 7% in 2012 and 4% year-over-year in 4M13, in
part due to acquisitions. However, EBITDA fell by 17% in 2012 (or by 13%
adjusting for legal costs). Tullett reported a loss before tax of GBP34.7
million at end-2012 (2011: GBP119.2 million profit) which included a non-cash
charge of GBP123 million related to the write-down of the carrying value of
goodwill from its North American business following the poaching of employees
by BGC in 2009.

Following recent acquisitions in the Americas (Covencao in Brazil and a few
small U.S. bolt-ons) and the initial front-loading of costs, Fitch expects the
profit contribution from the Americas to improve in 2013. Tullett's overall
margins have historically been lower than those of market leader ICAP,
although the voice business has enjoyed better margins. Fitch views Tullett's
actions on costs and restructuring (which began in 2011) as positive mitigants
to the revenue pressures being experienced, but they have not been sufficient
to stop the decline in earnings.

Tullett's senior bond issue in December 2012 has been used to refinance bank
borrowings, including GBP30m since end-2012. As a result, its gross level of
financial debt is broadly the same today as it was a year ago. Adjusting for
the repayments in early 2013, pro forma gross debt/ EBITDA was around 1.8x at
end-2012 (1.6x adjusting EBITDA for legal costs). This compares with 1.5x at
end-2011 (1.4x adjusting for legal costs), adjusting for the similar GBP30m
bank repayment made in early 2012. This means the weakening in these pro forma
gross leverage metrics is due to EBITDA pressure, rather than higher
indebtedness. Interest cover fell to 8.4x in 2012 from 9.4x in 2011. Covenant
headroom is comfortable. Fitch notes there is a base level of term debt which
the company operates with, and therefore there is likely to be limited scope
for debt amortisation, although surplus cash may be held at the holding
company level to pre-fund upcoming maturities.

Credit and market risks are considered low because of the name give up or
matched principal conventions employed. Refinancing risk is also low and
liquidity satisfactory, with very limited debt repayments before 2016.

RATING SENSITIVITIES - IDRS AND SENIOR DEBT

As with the other IDBs Tullett's IDR and senior debt ratings are sensitive to
changes in the financial profile, including leverage and interest coverage,
its ability to contain earnings pressure, as well as to regulatory
developments. Ratings may come under further pressure should these
developments be decidedly more negative for Tullett or its customers (global
banks) than currently assumed by Fitch or if Tullett fails to adjust its
business model to new market realities, supported by investment in technology
without materially jeopardising free cash flow generation. Equally, should
Tullett materially improve margins or successfully diversify its earnings,
Fitch would view this as a positive for the rating.

BGC Partners Inc.

KEY RATING DRIVERS

The downgrade of BGC's long-term IDR and senior debt ratings from 'BBB' to
'BBB-' reflects the persistently challenging operating and earnings
environment facing its IDB business. This is due in part to structural factors
as well as cyclical factors, increased concentration in low margin
voice/hybrid IDB and commercial real estate brokerage segments after the
pending sale of its high-margin eSpeed electronic trading platform, the
potential execution risks related to the deployment of proceeds from the
eSpeed sale. It also reflects BGC's significant interrelationship with its
parent, Cantor Fitzgerald L.P. (Cantor), who is also facing some pressures in
many of its core operating businesses. The ratings also incorporate key man
risk and concentrated decision making across the two firms.

Over the past two years, BGC's management has taken a number of steps to
transform its business in light of challenging operating conditions, first by
expanding into commercial real estate (CRE) brokerage business with two large
acquisitions, and then recently by announcing the sale of its on-the-run
benchmark two-, three-, five-, seven-, 10-, and 30-year fully-electronic
trading platform for U.S. Treasuries (eSpeed). This sale is expected to
generate $1.23 billion in proceeds for BGC, including $750 million in cash
this quarter. Fitch believes that both strategies will lead to more
concentration of revenues in cyclical and low-margin businesses, which will
continue to make the company's earnings susceptible to capital market trends.

Financial brokerage revenues, excluding CRE brokerage revenues, fell 11% and
6% for FY12 and 1Q13, year-over-year. While financial brokerage revenues
remain pressured, BGC's expansion in to real estate brokerage space is driving
costs higher, particularly in the compensation area, further pressuring
margins. Real estate brokerage is expected to continue to generate relatively
lower margins, until critical scale is achieved.

Historically, BGC has operated at lower leverage levels compared to its IDB
peers. However, the company's opportunistic debt funded acquisitions in recent
years, particularly in the CRE brokerage space, have coincided with very
challenging industry operating trends in the financial brokerage space, which
has resulted in weakened leverage and interest coverage metrics.

Fitch calculated leverage, measured as gross debt to trailing 12 month (TTM)
adjusted EBITDA, increased to 2.4x at 1Q13, from 1.5x in FY11 and 0.9x in
FY10. At the same time, increased borrowing costs from recent longer-term debt
issuances have resulted in weakening in interest coverage, measured as TTM
adjusted EBITDA to interest expense, to 5.3x in 1Q13, from 9.6x in FY11 and
14.6x in FY10. Both metrics are expected to improve as the company has
represented that it intends to hold $150 million of eSpeed proceeds in reserve
to pay down its $150 million April 2015 convertible note obligation to Cantor,
and invest a portion of the proceeds in cash generative business activities.

RATING SENSITIVITIES - IDRS AND SENIOR DEBT

Fitch's current ratings assume that the company will use a portion of the
proceeds from the eSpeed sale to repay a portion of its outstanding debt,
which should improve pro forma leverage and interest coverage metrics. The
ratings could come under pressure, absent such debt pay-down or material
improvement in top line EBITDA.

The ratings could also come under pressure if regulatory changes materially
impact the profitability or viability of certain business lines. Further, any
changes in Cantor's ratings could also result in changes to BGC's ratings.
Positive rating momentum, although limited in the medium term, will be driven
by sustained improvement in leverage, interest coverage, and profitability
metrics.

GFI Group, Inc.

KEY RATING DRIVERS

The affirmations of GFI's long-term IDR and senior unsecured debt ratings at
'BB' 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 more predictable
revenue streams and high operating margins. The Negative Outlook reflects
GFI's continued sensitivity to the challenging operating environment, given
its smaller scale and lack of revenue diversity.

On April 19, 2013, Fitch downgraded GFI's rating from 'BBB-' to 'BB',
reflecting sustained decline in profitability, increasing leverage,
deteriorating interest coverage, and a weaker liquidity profile. Fitch
believes that as the smallest of the top five IDBs, GFI has been more
susceptible to industry pressures, due to its relatively smaller scale, lower
revenue/product diversity and higher fixed-cost base, compared to its larger
IDB peers.

Consistent with broader IDB industry trends, GFI experienced lower revenues
and earnings in 1Q13, due to reduced risk appetite from clients and lower
market volatility. Revenues further fell 6% in 1Q13 from 1Q12, driven by 15%
decline in brokerage revenues. Positively, revenues from software, analytics,
and market data were robust and increased 11% due to strong growth in Trayport
revenues. Still, Fitch calculated EBITDA declined 9% to $86.2 million for
trailing 12 months (TTM) ending March 31, 2013, from $94.7 million in FY12.

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 in
2013 compared to the 2011 expense base. The compensation ratio declined to
56.1% in 1Q13 from 59.9% in 1Q12 (based on total revenues), the lowest level
seen in years driven by company's continued efforts to contain sign-on bonuses
and bring the overall cost in line with industry levels.

Leverage, measured as gross debt to TTM adjusted EBITDA, increased to 2.9x at
1Q13 from 2.6x at YE12, due to a decline in cash flows. Interest coverage,
measured as TTM adjusted EBITDA to interest expense, further declined to 3.1x
at 1Q13 from 3.5x at YE12. Absent an increase in EBITDA levels, interest
coverage ratio is expected to further deteriorate as the coupon on GFI's $250
million senior notes (current principal outstanding: $240 million) is expected
to increase to 10.375% based on interest-rate step-ups.

RATING SENSITIVITIES - IDRS AND SENIOR DEBT

The 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
coverage metrics.

Fitch has taken the following rating actions:

ICAP plc

--Long-term IDR downgraded to 'BBB' from 'BBB+'; Outlook Stable;

--Short-term IDR and commercial paper downgraded to 'F3' from 'F2';

--Senior debt downgraded to 'BBB' from 'BBB+';

--Subordinated debt downgraded to 'BBB-' from 'BBB'.

ICAP Group Holdings plc

--Long-term IDR downgraded to 'BBB' from 'BBB+'; Outlook Stable;

--Short-term IDR downgraded to 'F3' from 'F2';

--Senior debt downgraded to 'BBB' from 'BBB+'.

Tullett Prebon plc

--Long-term IDR downgraded to 'BBB-' from 'BBB'; Outlook Stable;

--Senior debt downgraded to 'BBB-' from 'BBB';

--Subordinated debt downgraded to 'BB+' from 'BBB-'.

BGC Partners Inc.

--Long-term IDR downgraded to 'BBB-' from 'BBB'; Outlook Stable;

--Short-term IDR downgraded to 'F3' from 'F2';

--Senior unsecured debt downgraded to 'BBB-' from 'BBB'.

GFI Group Inc.

--Long-term IDR affirmed at 'BB'; Outlook Negative;

--Short-term IDR affirmed at 'B';

--Senior unsecured debt affirmed at 'BB'.

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);

--'Rating FI Subsidiaries and Holding Companies' (August 2012).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

Securities Firms Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686137

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=795065

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Contact:

Fitch Ratings
Primary Analyst (ICAP plc, ICAP Group Holdings plc, Tullett Prebon plc)
Erwin Van Lumich, +34 93 323 8403
Managing Director
Fitch Ratings Espana, S.A.U.
Paseo de Gracia, 85, 7th Floor
08008 Barcelona
or
Primary Analyst (BGC Partners Inc, GFI Group Inc)
Mohak Rao, +1 212-908-0559
Director
One State Street Plaza,
New York, NY 10004
or
Secondary Analyst (ICAP plc, ICAP Group Holdings plc, Tullett Prebon plc)
Christopher Keeling, +44 3530 1494
Analyst
or
Secondary Analyst (BGC Partners Inc, GFI Group Inc)
Tara Kriss, +1 212-908-0369
Senior Director
or
Committee Chairperson
Christopher Wolfe, +1 212-908-0771
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com
 
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