Jefferies Converts Knight Preferred, Boosting Shares Outstanding

Jefferies Group Inc., the New York-based brokerage that helped arrange a $400 million bailout for Knight Capital Group Inc., has converted almost all of the preferred shares it acquired in the transaction to common stock.

The conversion almost doubled the outstanding stock of Knight, which was pushed to the brink of bankruptcy after its computers mistakenly bombarded U.S. markets with share orders on Aug. 1. Almost 182 million common shares were outstanding as of yesterday compared with 97.8 million on Aug. 31, according to data compiled by Bloomberg.

Jefferies helped assemble the group of investors that bought convertible securities representing a 73 percent stake. While the money enabled Jersey City, New Jersey-based Knight to remain solvent, it diluted existing stockholders whose ownership proportion will shrink as the convertibles are exercised.

“It’s a moot point from a shareholder perspective, because if you were holding the stock back on July 31 you were diluted,” said Chris Allen, an equity analyst at Evercore Partners in New York. “You lost money.”

According to the SEC filing, Jefferies converted into common stock about 122,000 of the 125,000 preferred shares it held. The brokerage said it owns 81.25 million Knight common shares, making it the largest shareholder, in a filing with the Securities and Exchange Commission Aug. 30. Richard Khaleel, a spokesman for Jefferies, declined to comment.

Conversion Eligible

Under an agreement between Knight and the investors, the first preferred securities were eligible to be swapped for common on Aug. 13 at $1.50 a share. There were no restrictions on when members of the investor group, which also includes TD Ameritrade Holding Corp., Blackstone Group LP, Getco LLC, Stifel Nicolaus & Co. and Stephens Inc., could sell common shares.

Allen said the conversion doesn’t necessarily mean Jefferies is preparing to sell to realize gains, though it gives it the flexibility to do so, he said.

Should Knight’s stock trade at $3 a share for 60 trading days, all preferred shares will automatically be converted to common. The stock closed at $2.74 today.

As of Sept. 4, the investors held 130,113 shares of Series A-1 Preferred Stock and 144,102 shares of Series A-2 Non-Voting Preferred Stock, each of which are convertible into 666.667 shares of common stock. Knight has begun posting updates on the number of outstanding common shares and preferred shares each Wednesday on its website.

Trading Range

Knight’s stock has traded in a six-cent band since Aug. 24 even as its market capitalization climbed to $498 million from $270 million since Sept. 4. The increase in overall value represents the additional shares created when investors exchange their convertible preferred stock for common shares.

Among the investors, Jefferies’s investment was the biggest at $125 million, according to a government filing by Knight. Getco and Blackstone bought $87.5 million each; TD Ameritrade received $40 million and Stephens and Stifel got $30 million each, it showed.

The additional market value does little to help investors who owned Knight shares prior to the trading loss. The stock has fallen 73 percent since the malfunction. The 267 million shares purchased in the bailout for $400 million have a value of $732 million based on Knight’s stock price.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE