MF Global Drops by Most Since 2008
MF Global Holdings Ltd. (MF), the futures broker that had its credit rating cut yesterday to the lowest investment grade, reported its largest-ever quarterly loss, sending shares down the most since March 2008.
The net deficit was $191.6 million, or $1.16 a share, for the three months ended in September, compared with $94.3 million, or 59 cents, a year earlier, New York-based MF Global said today. The biggest prior decline was $111.7 million in the three months ended March 2009, according to data compiled by Bloomberg. Excluding costs from restructuring, deferring tax asset valuations and retiring debt, the loss was 9 cents a share, missing the 5-cent average profit estimate of 11 analysts surveyed by Bloomberg.
Chief Executive Officer Jon Corzine, 64, who helped run Goldman Sachs Group Inc. from 1994 to 1999 and was governor of New Jersey and an ex-U.S. senator, is attempting to turn MF Global into a medium-sized investment bank. He’s failing to convince investors that he can transform the broker into a Wall Street contender, as it has dropped 75 percent since Aug. 1, compared with a 17 percent decline in an index of 11 securities broker-dealers.
“MF’s results are severely below expectations,” Ed Ditmire, an analyst with Macquarie Group Ltd. in New York, wrote in a note to clients. “It’s very likely that MF expectations need to be recalibrated lower over the near-term.” Ditmire had expected it to earn 3 cents a share on an adjusted basis.
MF Global Plunge
MF Global plunged 47.6 percent to $1.86 in New York trading. That’s the largest drop since March 2008 and is down from $9.21 on Jan. 10. Its $325 million of 3.375 percent convertible notes due in August 2018 dived 18.3 cents to 48.75 cents on the dollar, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.
Net revenue fell 14.3 percent to $205.9 million compared with the year-ago period, the company said today.
“Without question the quarterly market conditions were as difficult as I have experienced in my 30 years” in finance, Corzine said on a conference call with analysts, excluding the 2008 credit crisis when he was governor of New Jersey.
The company earns money by charging interest on client funds it holds that back futures trades. Corzine said the Federal Reserve target overnight interest rate, which has been between zero and 0.25 percent since late 2008, makes the futures brokerage business challenging.
“We’re vigorously and actively reviewing options that will allow us to get to scale” in the futures brokerage business, he said. Corzine didn’t answer when an analyst asked on the conference call about how competing futures brokers appeared in terms of business combinations.
Credit Rating Downgrade
The firm’s credit ratings were cut yesterday by Moody’s Investors Service on concern that the broker won’t meet earnings targets and isn’t sufficiently managing risk. The rating company lowered the long-term ranking to Baa3 from Baa2 and left MF Global on review for a further downgrade.
“If market volatility stays elevated, we question how the firm is going to achieve the earnings necessary to avoid a downgrade of its debt to junk status, which in turn could materially impact its ability to act as a counterparty as well as raise MF’s cost of debt,” Patrick O’Shaughnessy, an analyst at Raymond James & Associates in Chicago, said in a note to clients.
Moody’s highlighted added exposure through repurchase transactions to the debt of European governments that have been among the hardest hit by the region’s sovereign crisis.
Net Book Value
While MF Global has had nine losses in the last 11 quarters, it previously benefitted from the perception that the securities it owns are valuable, Ditmire said in a telephone interview. The company reported a net book value, the measure of the value of its securities minus debts it owes, as $7.44 a share today.
“This European sovereign exposure has cut that support,” Ditmire said, sending the stock far below its net book value. “It makes people think that book value isn’t as certain as they thought.”
The broker has “little principal risk” from its exposure to Europe and is not adding to the positions, Corzine said. The short-term debt positions are “my personal responsibility and a prime focus of my attention,” he said.
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.
“We are disappointed with the action” by Moody’s, Corzine said. “We think we can grow our earnings, we’re confident of that.”
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