– MF Global Files for Bankruptcy After Bad Bets on European Debt (Bloomberg, Oct. 31, 2011):
MF Global Holdings Ltd., the holding company for the broker-dealer run by former New Jersey governor and Goldman Sachs Group Inc. co-chairman Jon Corzine, filed for bankruptcy protection as it seeks to reorganize after making bets on European sovereign debt.
The New York-based firm listed debt of $39.7 billion and assets of $41 billion in Chapter 11 papers filed today in U.S. Bankruptcy Court in Manhattan, making it the eighth-largest U.S. bankruptcy by assets, according to bankruptcydata.com. MF Global’s board met through the weekend in New York to consider options including a sale to avert failure, according to a person with direct knowledge of the situation.
“They were trying to get a deal but at the end of the day the majority of their business is built on trust,” Scott Peltz, the national leader of RSM McGladrey’s Financial Advisory Services Group in Chicago, said today in an interview. “They had a huge position in European debt, which led to a lot of the troubles. There will be questions about that.”
Corzine, 64, who helped run Goldman Sachs from 1994 to 1999, sought to transform MF Global into a midsize investment bank after arriving there in March 2010. He increased the firm’s risk and used its own money to trade, including investments in European sovereign debt that rattled markets.
MF Global owns $6.3 billion of Italian, Spanish, Belgian, Portuguese and Irish debt, the company said in an Oct. 25 presentation. Concerns that it might lose money on the holdings amid Europe’s debt crisis led to demands from regulators to boost capital, credit downgrades, margin calls and bankruptcy, MF Global President Bradley Abelow said.
MF Global aims to complete “a successful, rapid reorganization” of its finances in court, while maintaining a “business-as-usual atmosphere,” Abelow said in an affidavit. The company’s regulated U.S. broker-dealer unit, MF Global Inc., didn’t file for bankruptcy.
The firm has drawn almost all of a $1.2 billion credit line that was amended last year to give it more liquidity, Abelow said. The broker-dealer unit has borrowed about $210 million of a $300 million secured credit line, he said. JPMorgan Chase & Co. is the agent for the two credit lines.
MF Global’s finance unit, MF Global Finance USA Inc., also filed for bankruptcy, listing debt of as much as $50 million and assets of as much as $500 million. The holding company asked the bankruptcy court for permission to continue intercompany transactions between its bankrupt businesses and non-bankrupt units, allowing MF Global to maintain its deposits, investments and bank accounts.
“The boards of directors of both entities authorized the filing of the Chapter 11 petition in order to protect their assets,” the companies said today in a statement. MF Global U.K. Ltd. separately entered administration in Britain with administrators appointed from KPMG LLP, the Financial Services Authority said.
MF Global reported a $191.6 million quarterly loss on Oct. 25 and Moody’s Investors Service and Fitch Ratings cut its credit rankings to junk. Before the bankruptcy filing, MF Global was suspended today from doing new business with the New York Federal Reserve, according to a statement on the regulator’s website, and trading in the stock was halted.
MF Global declined 67 percent last week and its bonds started trading at distressed levels amid its disclosures of bets on European sovereign-debt. MF Global held talks with five potential buyers for all or parts of the company, including banks, private-equity firms and brokers, said the person, who asked not to be identified because the talks were private.
The firm was getting advice from Evercore Partners Inc. as it sought buyers. Skadden, Arps, Slate Meagher & Flom LLP is representing the company as bankruptcy counsel. The case was initially assigned to U.S. Bankruptcy Judge Stuart Bernstein and later transferred to Judge Martin Glenn, who handled Borders Group Inc.’s bankruptcy.
MF Global, based in the U.S. with offices in at least seven other countries, has about 2,870 employees, with 13 employed by bankrupt units in the U.S. Revenue was $2.2 billion in fiscal 2011, with a net loss for the parent of $81.2 million.
The broker of commodities, derivatives, equity and foreign exchange had $7.2 billion of customer funds in segregated accounts as of Aug. 31, according to the Commodity Futures Trading Commission. It was one of 22 primary dealers authorized to trade U.S. government securities with the New York Fed and is a member of more than 70 financial exchanges, according to its website.
A list of unsecured creditors filed by MF Global includes JPMorgan Chase, as trustee for holders of $1.2 billion in debt, and Deutsche Bank AG, as trustee for holders of more than $1 billion in notes due in 2016 and 2018.
JPMorgan itself holds less than $80 million of the debt, said Joseph Evangelisti, a spokesman for the New York-based bank. JPMorgan also has $26 million in collateral belonging to MF Global that “may be subject to liens in favor” of the bank, MF Global said.
Armin Niedermeier, a spokesman for Frankfurt-based Deutsche Bank, declined to comment. Other unsecured creditors include Headstrong Services LLC, owed $3.9 million; CNBC, owed $845,397; and law firm Sullivan & Cromwell LLP, owed $596,939.
MF Global asked for a Jan. 30 deadline to file its full list of debts and assets, seeking a 75-day extension of the usual two-week window given under bankruptcy law. The company “is one of the largest brokers in markets for commodities and listed derivatives,” making it large and complex enough to require more time, MF Global said in court papers.
MF Global’s 6.25 percent notes due 2016, which traded at 43 cents on the dollar earlier today, fell to 35 cents after the bankruptcy filing, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds traded as high as 104 cents as of Sept. 7.
MF Global’s largest common shareholders as of Sept. 30 were Pyramis Global Advisors LLC, with 8.4 percent, and RS Investments in San Francisco, with 7.8 percent, according to court papers. RS has sold its entire stake, Erin Burke, a spokeswoman for the firm, said in an e-mail.
Fine Capital Partners LP held 7.4 percent and Cadian Capital Management LLC had 6.2 percent, the company said. J.C. Flowers & Co. owns 1.5 million preferred shares, MF Global said.
MF Global, formerly part of Man Group Plc, has its roots in a sugar brokerage founded by James Man in England in 1793. MF Global became a public company in a 2007 spinoff. It was built up before the spinoff by acquiring the assets of bankrupt brokerage Refco Inc. in 2005.
Generally, broker-dealers aren’t eligible to file for Chapter 11 bankruptcy, and need to either sell assets, as Bear Stearns Cos. did in 2008 to JPMorgan, or liquidate, as did Lehman Brothers Holdings Inc.’s brokerage unit and Bernard Madoff’s firm.
Liquidations are overseen by the Securities Investor Protection Corp. so as to return or replace customer securities. SIPC, created under the Securities Investor Protection Act, insures losses of as much as $500,000 a customer in registered securities.
“SIPC is aware of the situation and is in contact with the” U.S. Securities and Exchange Commission, Ailis Aaron Wolf, a spokeswoman for the SIPC, said today in a phone interview. She declined to comment on whether the agency would oversee the unwinding of the brokerage unit, saying there wasn’t enough information at this time.
Corzine reached out to Goldman Sachs about selling all or part of the company, according to two people with knowledge of the firm’s deliberations. Macquarie Group Ltd. examined MF Global’s books, according to a person with knowledge of the situation. Paula Chirhart, a spokeswoman for Macquarie in New York, declined to comment.
Barclays Plc was among banks that looked at MF Global, another person said. Kerrie Cohen, a bank spokeswoman in New York, declined to comment.
State Street Corp., which was also reported to be a potential bidder, doesn’t comment on rumors, Hannah Grove, a spokeswoman for the Boston-based firm, said in an e-mail.
“We’re investing in the future of this business,” Corzine said in a May statement that announced new hires in its commodities and derivatives areas. In August, the company sold $325 million in senior unsecured notes to repay part of the $1.2 billion revolving credit facility, according to company statements.
MF Global increased net capital at the U.S. unit after Finra raised concern about the risks to its European debt portfolio, it said in September.
“We are confident that we have the resources, capital, liquidity and expertise to successfully manage our European exposures to their end date maturity of December 2012,” Diana DeSocio, a spokeswoman for the broker, said in an Oct. 24 statement.
The case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).