Fitch Downgrades Cantor Fitzgerald L.P. to 'BBB-/F3'; Outlook Stable
NEW YORK -- June 28, 2013
Fitch Ratings has downgraded Cantor Fitzgerald, L.P.'s (Cantor) long- and
short-term Issuer Default Ratings (IDRs) to 'BBB-/F3 ' from 'BBB/F2' and
revised the Rating Outlook to Stable from Negative. Cantor's ratings were
initially assigned a Negative Outlook on Jan. 8, 2013.
KEY RATING DRIVERS - IDRs AND SENIOR DEBT
The downgrade reflects the highly cyclical and difficult operating conditions
facing Cantor's core institutional businesses, the inflexible operating cost
base at some of its subsidiaries, particularly in light of its expansion
efforts, increased business and reputational risk associated with Cantor's
non-core venture investments, and its significant interrelationship with its
subsidiary BGC Partners, Inc. (BGC). BGC is facing structural challenges to
its inter-dealer broker (IDB) business model from proposed and pending
Current ratings also take into account key-man risk and concentrated
decisionmaking across Cantor and BGC, as well as Cantor's distribution-focused
business model, low-risk balance sheet, conservative leverage targets, and
adequate liquidity and capitalization which support the current ratings.
Over the years, Cantor has increased the number of investments in non-core
ventures that bear little or no strategic relevance to Cantor's core business
(e.g. Cantor Gaming, Cantor Insurance, Delivery.com, etc.). Most of these
ventures are operating at modest losses and continue to be a drag on
consolidated operating performance. Fitch views the increase in the number of
such ventures negatively as they consume capital and management attention
while introducing potential reputational and operational risks. Although,
capital deployment in these ventures has been measured to date, these ventures
reduce clarity around the firm's overall strategic direction.
Cantor's operating performance improved year-over-year in 2012, as strong
performance in the institutional debt business and Cantor Commercial Real
Estate (CCRE) more than offset weakening performance in the institutional
equity business and BGC's IDB business. However, in 1Q'13 many business
segments were affected negatively by lower trading activity pressuring pre-tax
margins, reflecting the inherent cyclicality in the company's business model
and its large dependence on capital markets activity.
Fitch believes that ongoing economic and regulatory uncertainties will
continue to pressure trading volumes, which, combined with Cantor's continued
expansion efforts, will likely pressure profit margins for core businesses in
Similar to industry peers, Cantor's consolidated leverage ratios have declined
post-fiscal crisis in response to the uncertain economic environment. Net
leverage, adjusted for reverse repurchase agreements which are predominantly
backed by high-quality assets, did increase year-over-year in 1Q'13, but is
still within management's articulated leverage target. Fitch expects
management to operate with adequate leverage cushion over its targets given
the still uncertain economic outlook.
Cantor's liquidity is adequate for its current rating level. Liquidity at the
parent level has declined compared to historical levels, as the company is
holding an increased proportion of liquidity at its primary regulated
broker-dealer subsidiaries in the U.S. and U.K., in light of current volatile
capital market conditions and increased regulatory requirements. Fitch notes
that Cantor faces a $300 million debt maturity in June 2015, which could
introduce liquidity/refinancing risk, particularly if operating cash flows
continue to be stressed. This is partially offset by $150 million that BGC
intends to hold in a reserve to pay down its April 2015 convertible debt
issued to Cantor.
RATING SENSITIVITIES - IDRS AND SENIOR DEBT
The revision of the Outlook to Stable reflects Fitch's view that, at the
current rating level, near- to medium-term challenges to Cantor's operating
environment, along with the potential structural changes affecting BGC's
business model, are sufficiently mitigated by available capital and liquidity
Ratings could come under pressure if operating performance continues to
materially deteriorate leading to depletion of capital, gross and net leverage
ratios trend materially higher than current levels, there is evidence of
increased risk appetite in the reverse repo or securities inventory book, or a
sustained decline in parent company liquidity levels. Ratings also remain
sensitive to changes in BGC's ratings.
Conversely, successful cost containment, as evidenced by improved margins
while maintaining moderate risk appetite, low leverage, effective operational
risk management, and sufficient capital and liquidity levels could lead to
long-term positive rating momentum. Additionally, restricting further
expansion in non-core ventures along with timely sale or closure of non-core
and non-viable ventures would be viewed favorably.
Formed in 1945, Cantor Fitzgerald L.P. 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 limited partners.
Fitch has downgraded the following ratings:
Cantor Fitzgerald, L.P.
--Long-term IDR to 'BBB-' from 'BBB';
--Short-term IDR to 'F3' from 'F2'
--Senior unsecured debt to 'BBB-' from 'BBB'.
The Rating Outlook is now Stable.
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:
Securities Firms Criteria
Global Financial Institutions Rating 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
Tara Kriss, +1 212-908-0369
Christopher Wolfe, +1 212-908-0771
Brian Bertsch, +1 212-908-0549
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