A Bond Offering with a Twist
MF Global Holdings is taking the cult of the Wall Street chief executive officer to a new level. The futures broker sold $325 million of five-year unsecured notes that come with an unusual feature: They will pay an extra percentage point of interest if Chairman and CEO Jon S. Corzine is named to a federal post and confirmed by the Senate before July 2013, according to a regulatory filing. “That seems crazy,” said William Larkin Jr., a fixed-income portfolio manager who oversees $500 million at Cabot Money Management in Salem, Mass., and has 22 years of experience. “I’ve never heard of something like this.”
Corzine, the 64-year-old former governor of New Jersey, helped run Goldman Sachs from 1994 to 1999 and served in the Senate from 2001 to 2006. Since joining MF Global last year, he’s taken more risk with the firm’s money in a bid to remake the broker into a midsize investment bank. Shares rose 9.5 percent in the 12 months through Aug. 2, while the Standard & Poor’s financial stock index fell 4.9 percent.
A Democrat, Corzine is among the biggest fundraisers for President Barack Obama’s 2012 reelection campaign. There has been speculation that Corzine might be considered for jobs such as Treasury Secretary or White House economic adviser. Jay Carney, the White House press secretary, says he has “no knowledge” that Corzine is being considered for such a post. He declined to comment on the bond sale. “Jon’s not been made any offers,” says Diana DeSocio, an MF Global spokeswoman. “He’s made it clear to MF Global’s investors, clients, and employees that he’s committed to being here well beyond” July 13, the date specified in the offering.
Corzine’s employment contract is written in anticipation of future government service. It stipulates that he’ll be paid his $1.5 million retention bonus on a prorated basis if he leaves to work for any “U.S. federal, state or local government” before Mar. 31, 2014. “Apparently, Corzine is a big enough deal to the company that if he leaves, potential investors demanded a little extra protection,” says Alexander Diaz-Matos, an analyst at Covenant Review, which analyzes bondholder protections. He says the fact that the interest rate increase takes effect only if Corzine leaves for a government job “makes it even more unusual.”
A rate increase of 1 percentage point, or 100 basis points, is the least that bondholders should seek as protection against a Corzine departure, according to Sean Egan, president of Egan-Jones Ratings, a credit-rating company. “We believe Corzine is worth more than a 100 basis-point increase,” Egan says. “Corzine’s departure is a major risk.”
Larkin says he doubts the idea will catch on elsewhere. “I’m guessing this is a one-time thing—he does have sort of a rock-star component to him,” Larkin says. “The management should never be one person. If it’s one person that’s critically important, I tend to avoid the company.”