MF Global Claims Trade Higher as Customers Seek 100% Back

MF Global Inc. customers who had money trapped when the U.S. broker collapsed are rushing to sell their claims at higher prices after a prediction they could recover 100 percent of what was lost, claims buyers said.

Louis Freeh, the trustee for the brokerage’s parent, MF Global Holdings Ltd., said today at a U.S. Senate Agriculture Committee hearing in Washington that customers may eventually recoup all of their money. His testimony was at odds with that of a trustee for the brokerage, James Giddens, who predicted customers will eventually get a recovery of about 90 percent. Those who buy customer claims said prices and volumes are increasing today as a result.

“Freeh’s statement set off a frenzy,” said Joe Sarachek, managing director of special situations at CRT Capital Group LLC, which buys and sells distressed debt. “Giddens’s statement hasn’t tempered that, which is crazy.”

Sarachek said Giddens’s math shows an 88 percent payout for commodities customers and an 82 percent payout for customers who trade on foreign exchanges if he wins a lawsuit with MF Global’s U.K. unit.

CRT is seeing claims trade today for about 1 cent on the dollar higher than yesterday, Sarachek said. For commodity claims, the range is now 96 to 96.5 cents on the dollar, and for customers who traded on foreign exchanges, it’s 82 cents to 84 cents, depending on the size of the claim.

Larger claims often sell for higher prices because buyers pay less in transaction fees.

Clearer Range

“The phones have been going all morning,” said Barrett Mikelberg, a director at New York-based Triax Capital Advisors. “People are reaching out to see what their claims can be bought for after the news.”

With a clearer range of what recoveries could be, customers are saying, “Let’s take the money now and put it back to work and eliminate the bankruptcy exposure,” Mikelberg said.

His firm is paying as much as 96 cents on the dollar for commodity claims and in the low 80-cent range for foreign claims, he said.

Andrew Gottesman, a director at SecondMarket Holdings Inc., which holds monthly auctions on claims, said a price change won’t be apparent until the next auction, on Aug. 22. The most recent one showed commodity claims trading from 94 cents to 96 cents, and 76 cents to 78 cents for foreign claims.

‘Different Agenda’

“At most, today’s testimony drives the ask,” Gottesman said. Smart buyers should keep in mind that Freeh, who oversees distributions to creditors, is one step removed from the customer claims, which are in Giddens’s jurisdiction, Gottesman said.

Freeh also has “a different agenda” from Giddens because unless the customers are fully repaid, creditors will get nothing, Gottesman said.

Bond prices are also trading at high levels after today’s news, said Kevin Starke, an analyst at CRT Capital Group LLC. Bank and bond debt at around 44 cents to 45 cents on the dollar are “lofty levels,” Starke said in a research note.

Even if a report in today’s Wall Street Journal citing an unnamed source as saying $500 million may be left to pay creditors at the holding company is correct, bond prices are still high, noted Sarachek. A $500 million recovery would only be a 25 cent recovery for bonds, Sarachek said.

MF Global’s 6.25 percent notes due 2016 most recently traded at 44 cents on the dollar, according to Trace, the bond price reporting system of the Financial Regulatory Authority.

June Trades

In June, there were 270 trades of MF Global customer claims with a face value of $296.8 million, according to data from SecondMarket. MF Global bankruptcy claims were the second most actively traded after those of Lehman Brothers Holdings Inc., SecondMarket said.

Sonar Credit Partners II, Longacre Institutional Opportunity Fund LP, and CRT Special Investments LLC have been among the active buyers of MF Global Inc. claims in past weeks, according to court filings.

MF Global Holdings Ltd., the brokerage’s parent company, filed the eighth-largest U.S. bankruptcy in Manhattan court on Oct. 31 with debt of almost $40 billion. MF Global Inc.’s wind-down is being overseen under the Securities Investor Protection Corp. in the same court.

U.S. lawmakers called today’s hearing to oversee the response to the MF Global downfall and the collapse of Peregrine Financial Group Inc.

Commodity Customers

Giddens, who has said he sees a potential $1.6 billion shortfall to what customers say they’re owed, has distributed about 80 percent of what commodity futures customers are owed. He is still evaluating claims and said his largest disputes with claimants include those with the company’s U.K. Joint Special Administrators.

A trial is to start in April to resolve a dispute over $700 million of customer funds.

Giddens may also sue former MF Global Chief Executive Officer Jon S. Corzine, former chief financial officer Henri Steenkamp and former assistant treasurer Edith O’Brien, among others, as a way to recover more money for creditors, he said.

The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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