Fitch Completes IDBs Peer Review; Affirms ICAP, TP and BGC; Downgrades GFI
NEW YORK & LONDON -- June 24, 2014
Fitch Ratings has completed a peer review of four rated inter-dealer brokers
(IDBs). Based on this review, Fitch has affirmed the following long-term
Issuer Default Ratings (IDRs):
--ICAP plc (ICAP) at 'BBB', Outlook Stable;
--Tullett Prebon plc (Tullett) at 'BBB-'; Outlook Stable;
--BGC Partners Inc. (BGC) at 'BBB-', Outlook Stable.
In addition, Fitch has downgraded the IDR for GFI Group Inc. (GFI) to 'BB-'
from 'BB'. The Rating Outlook remains Negative.
Please refer to company specific press release published today, and available
on Fitch's website, for further rating rationale.
CHALLENGING OPERATING ENVIRONMENT
IDBs continue to face a challenging operating environment as global trading
activity remains subdued reflecting persistently low volatility, the more
onerous regulatory environment for their dealer clients, and the uncertainty
associated with structural regulatory reforms of the over-the-counter (OTC)
derivatives markets. Fitch believes some of these trends will continue
impacting brokerage revenues in the near to intermediate term.
MIXED REGULATORY IMPACT
Major regulatory rules impacting the swap markets went into effect in the U.S.
in the 1Q'14, reducing barriers to entry and increasing competition for some
brokered products. However, trading volumes on swap execution facilities (SEF)
has been below industry expectations as some of the mandatory trading rules
impacting buy side firms are still subject to phase-in, keeping market
participants away. IDBs have continued their dominance in the inter-dealer
market due to the inclusion of voice brokered trades in SEF but have not been
able to gain traction in the dealer-client market.
Fitch believes that in the longer run, use of central counterparty clearing,
introduction of SEFs and organized trading facilities and mandatory trade
reporting will increase liquidity and trading in swap products, potentially
offsetting declines in margins/commissions from increased competition.
COST CUTTING/BUSINESS DIVERSITY MITIGATES REVENUE PRESSURE
IDBs have responded to the persistent decline in brokerage revenues by
rationalizing their cost base with an emphasis on cutting compensation costs,
which has helped to stabilize profit margins. Fitch expects additional cost
saving actions to continue which should help create positive operating
leverage and benefit the companies in the longer run.
IDBs have, to varying extent, focused on growing contribution from
non-brokerage businesses, either organically or through acquisitions. This
should help increase revenue and business diversity, particularly when they
are uncorrelated or less correlated to financial market trends. Fitch expects
IDBs to remain disciplined in their non-brokerage acquisition strategy in
terms of managing funding and integration risk.
A return to aggressive compensation practices or large cash/debt funded
acquisitions could put pressure on the IDB sector or individual companies.
LEVERAGE LEVELS STABILIZING
Leverage levels have generally stabilized as most IDBs have focused on
repaying debt. Fitch does not expect any IDB to add incremental debt to its
balance sheet. As such, further improvements in leverage will be more of a
function of improvement in EBITDA levels. Interest coverage levels have also
stabilized and are appropriate for each IDBs rating level. Near term debt
maturities are manageable considering excess liquidity and pre funding of
debt, in some cases.
Additional information is available on 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);
--'Securities Firms Criteria' (Jan. 31, 2014);
--'2014 Outlook: Securities Firms' (Nov. 21, 2013);
--'Inter-Dealer Brokers: Challenges and Opportunities from New Regulations
(Oct. 2, 2013).
Applicable Criteria and Related Research:
2014 Outlook: U.S. Securities Firms (Capital and Liquidity Counterbalance
Challenging Market Conditions)
Inter-Dealer Brokers: Challenges and Opportunities from New Regulations
Global Financial Institutions Rating Criteria
Securities Firms Criteria
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ON THE FITCH WEBSITE.
Primary Analyst - BGC, GFI
Mohak Rao, CFA
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
Primary Analyst - ICAP, TP
+44 20 3530 1012
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
Secondary Analyst - BGC, GFI
Secondary Analyst - ICAP, TP
Erwin Van Lumich
+34 93 323 8403
Brian Bertsch, +1-212-908-0549
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