MF Global Enters Distress With 18% Yields

Debt traders pushed the bonds of MF Global Holdings Ltd. (MF) into distressed territory for the first time as the futures brokerage headed by former Goldman Sachs Group Inc. leader Jon Corzine struggles to transform itself into an investment bank.

The $325 million of 6.25 percent bonds, due in August 2016, fell 24.8 cents yesterday to 63.8 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The tumble brought the yield on the bonds to 17.83 percent, or 16.8 percentage points more than comparable-maturity Treasuries, according to Trace the bond- price reporting system of the Financial Regulatory Authority.

MF reported its biggest quarterly loss ever yesterday, after having its credit ratings cut a day earlier by Moody’s Investors Service on concern that the broker won’t meet earnings targets and may not be able to manage investments in European sovereign debt. The company’s shares fell 48 percent.

“It’s aggregated risk,” said Richard Repetto, an analyst at Sandler O’Neill & Partners LP. The positions in Europe, the further downgrade potential and the quarterly loss, combined to discourage investors, he said.

Moody’s lowered the long-term ranking to Baa3 from Baa2 and left MF Global on review for a further downgrade to junk status after highlighting its repurchase transactions to debt of European governments that have been hit by the region’s debt crisis. Junk bonds are rated below Baa3 by Moody’s and BBB- by Standard & Poor’s.

Corzine Clause

Bonds trading at spreads of more than 10 percentage points are considered distressed. S&P said in a report yesterday that its ratio of distressed securities to the overall junk-bond market rose to 19.3 percent on Oct. 14 from 14.9 percent a month earlier.

MF Global has a policy of not commenting on moves in its bond prices, said Diana DeSocio, a spokeswoman.

Corzine, 64, who helped run Goldman Sachs from 1994 to 1999, is failing to convince investors that he can transform the futures broker into a Wall Street contender.

The 6.25 percent notes may pay an extra percentage point of interest if Corzine, who was governor of and U.S. Senator from New Jersey after he left Goldman Sachs, is named to a federal post and confirmed by the Senate before July 2013, MF Global said in an Aug. 9 regulatory filing. That so-called key man clause wouldn’t be triggered if the bonds were upgraded to ratings of A3 by Moody’s and A- by Standard & Poor’s.

The idea behind the clause was to alleviate concern among investors that Corzine might leave, according to a person with knowledge of the structure of the offering.

Collateral Calls

Analysts at KBW Inc., led by Niamh Alexander, wrote in a note yesterday that the Moody’s downgrade and lower earnings could cause a ripple effect on the company, raising borrowing costs and triggering collateral calls.

“It also exposes MF to collateral calls of up to $5 million,” the note said. “We believe it could also prompt lenders to reduce financing, clients to withdraw assets and trigger the need to recognize losses on certain bilateral over- the-counter and off-balance sheet transactions.”

MF Global said yesterday it had a net loss of $191.6 million, or $1.16 a share, for the three months ended Sept. 30, compared with a loss of $94.3 million, or 59 cents, a year earlier. Net revenue fell 14.3 percent to $205.9 million.

European Positions

The firm earns money by charging interest on client funds it holds that back futures trades. Corzine said the Federal Reserve’s target overnight interest rate, which has been between zero and 0.25 percent since late 2008, makes the futures brokerage business challenging.

The “current low interest environment and volatile capital market conditions” make it unlikely MF Global can achieve targets of $200 million to $300 million in annual pretax profit, Moody’s said in its Oct. 24 report.

The broker has “little principal risk” from its positions in Europe and isn’t adding to them, Corzine said on a conference call with analysts yesterday. The short-term debt positions are “my personal responsibility and a prime focus of my attention,” he said.

MF Global is lagging behind its peers in the broker-dealer community. Average yields on bonds from brokerage houses are 4.98 percent and those on all BBB rated issues are 4.46 percent, according to Bank of America Merrill Lynch Index data. MF’s shares have dropped 75 percent since Aug. 1, the day before the bond sale, compared with a 17 percent decline in an index of 11 securities broker-dealers.

The one thing holding the company together right now may be Corzine at the helm, Repetto said.

“If he’s gone, forget about it,” he said. “Customers flee and it’s even worse.”

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.

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