Cantor Fitzgerald LP, the investment bank planning to add 800 people, was cut to junk by Moody’s Investors Service as the ratings company said the expansion has failed to sufficiently boost profit.
The firm run by Howard Lutnick, which has increased the amount of money it commits to buy and sell bonds, was downgraded to Ba1, the highest level of speculative grade, Moody’s said today in a statement. Moody’s said it expects “the capital markets operating environment to be challenging for all participants for the medium term.”
Lutnick has been hiring to expand in capital markets and grow outside the U.S. as a decline in trading pressures profits at its brokerage unit. While the New York-based company is diversifying revenues by adding new business, its compensation expenses have “remained stubbornly high, resulting in only modest profitability,” Moody’s said.
“It certainly makes it difficult to expand a company in the face of a significant downgrade,” Brad Hintz, an analyst at Sanford C. Bernstein & Co., said in an e-mail. “A non- investment-grade rating for a broker is not a death sentence, but the lower rating will limit financing alternatives and reduce the willingness of counterparties to deal with a firm.”
Sheryl Lee, a Cantor spokeswoman, said she had no immediate comment.
“This was about modest profitability and nothing else,” Peter Nerby, the author of the Moody’s report, said in a telephone interview. “They’re a very liquid company.”
Closely held Cantor still has investment-grade rankings of BBB from Standard & Poor’s and Fitch Ratings. S&P lowered its outlook on Cantor to negative on Jan. 27, saying that the firm’s profitability was low due to market conditions, its effort to cut risk and leverage and because of “some employee turnover.”
“The question is, how is the Street going to handle this and how do the employees feel since they have put a large chunk of their earnings in the Cantor stock?” said Michael Maloney, president of New York-based recruitment firm Maloney Inc.
Cantor, which lost 658 employees in the Sept. 11 World Trade Center attacks, has sought to diversify revenue sources aside from its inter-dealer brokerage franchise, BGC Partners Inc., by adding sales, trading and banking capabilities, Moody’s said. BGC, which was downgraded to Ba2 from Ba1, and Cantor are “closely integrated,” and their credit grades will likely move together in the future, the credit-rating company said.
The expansion has “added some revenues,” Nerby said. “It’s not producing tremendous profitability.”
The firm’s brokerage arm, Cantor Fitzgerald & Co., plans to boost its staff from the current 1,600 in the next few years, unit Chief Executive Officer Shawn Matthews said in June. Matthews said in August that Cantor will probably add an additional 500 sales traders in the next two years and plans to build its investment-banking and asset-management units.
The company has $800 million of bonds outstanding, including 7.875 percent notes due in October 2019 and 6.375 percent bonds maturing in June 2015, according to data compiled by Bloomberg.
Money manager Loomis Sayles & Co., based in Boston, owns 14 percent of the securities, two units of Pacific Investment Management Co. in Newport Beach, California, hold about 10 percent and Calvert Group Ltd. in Bethesda, Maryland, owns 5.4 percent, Bloomberg data show.