MF Global in 'Advanced Negotiations' to Sell Futures ArmPublished: Friday, 28 Oct 2011 | 9:40 AM ET
MF Global Holdings is in "advanced negotiations" to sell its struggling futures brokerage, a source close to the company told CNBC.
MF is hoping to reach a deal for its futures arm by Monday, if not sooner, the source said. The company reportedly tapped its $1.3 billion credit lines "to preserve liquidity," and remains in contact with regulators, the source said.
Clients Flee as Its Troubles Grow
This step comes amid reports that some customers are moving money away from the struggling futures brokerage, according to hedge funds, rivals, and analysts, though the extent of the outflows is unclear.
Any substantial departures will likely put further pressure on MF Global Chief Executive Jon Corzine, a former New Jersey governor and former head of Goldman Sachs, to sell all or part of the company.
MF Global [MF 1.3093 -0.1207 (-8.44%) ], whose shares slumped 15.9 percent on Thursday and have lost more than 60 percent of their value this week, had been trying to transform from a brokerage that mainly places customers' trades on exchanges into an investment bank that bet with its own capital.
But its bets on bonds from euro zone countries, including those issued by Italy, Spain, Portugal and Ireland , have gone bad, prompting regulators to press it to boost capital and two rating agencies to cut the company's debt rating to "junk" status.
One hedge fund that Reuters spoke to said that MF Global's problems have spurred the fund to move some of its assets to a different broker. Three brokers at rival firms said they were signing up customers who were formerly at MF Global, and Patrick O'Shaughnessy, an analyst at Raymond James in Chicago, said his conversations with customers indicate there have been "significant departures." But three other customers said they were not moving their accounts.
Client funds that are typically held in so-called "segregated accounts" should be protected even in the worst-case scenario of financial failure, they said.
MF Global declined to comment.
Its management has been working to try to reassure customers and staff, sources said. Corzine held a call on Wednesday with staff, according to two people on the call.
"He said things are fine, pretty much," one source said.
Another source, who was briefed on the matter, said MF Global is experiencing some "excess margin sweeping" by clients, but not a loss of core positions. Clients are "only taking some of their excess out, which some big institutions do every day," the source said.
Moody's Investors Service and Fitch Ratings on Thursday slashed MF Global's debt rating to junk. Standard & Poor's said on Wednesday it might also cut the New York-based company's counterparty credit rating to junk.
Moody's said the downgrade reflected its view that "MF Global's weak core profitability contributed to it taking on substantial risk in the form of its exposure to European sovereign debt in peripheral countries."
At the end of the second quarter, MF Global's $6.3 billion exposure to European governments represented five times the company's tangible common equity, it said.
On Wednesday, the company sent a letter to customers listing protections available to its commodities, futures, and options securities clients.
Rivals said they are nevertheless winning customers from MF Global.
"I was getting calls yesterday from people who were shopping other firms because they were worried about MF," a Chicago floor trader who said he opened three new accounts for former MF Global customers on Tuesday told Reuters. "Whether it's justified or not yet, they were worried."
A rival broker in New York said: "I don't even have to reach out to their customers — they're reaching out to me."
Concerns about customer defections were enough to prompt O'Shaughnessy at Raymond James to downgrade the company to "market perform" from "outperform."
"Our conversations with retail and institutional customers suggest that MF Global has and will continue to experience significant departures," O'Shaughnessy wrote in a note. The exodus could trigger more credit ratings downgrades and further weigh on profits, he added.
Dick Bove, an analyst at Rochdale Securities, said in a note on Wednesday that MF Global must sell off assets as quickly as possible. Bove added that Goldman Sachs Group [GS 115.259 0.349 (+0.3%) ] may be a buyer for all or part of the company.
Goldman declined to comment.
Investment bank Evercore is advising MF Global on its options now, a source familiar with the matter said.
MF Global's history dates back more than 200 years, to a sugar broker that started in London. The company, formerly known as Man Financial, acquired Refco's U.S. futures business in 2005 after that broker collapsed in an accounting scandal.
For years, MF Global focused on futures brokerage, but Corzine, who took over as CEO in March 2010, looked to build the company into an investment bank that made more bets with its own funds.
The company took substantial positions in European sovereign debt . As of the end of September, MF Global held $6.3 billion of European debt maturing by the end of 2012. The market value of those positions dropped over the summer as the European debt crisis worsened, and the Financial Industry Regulatory Authority, an industry regulator, pressed the company to boost its capital levels.
The company's credit lines have been drawn down upon but not exhausted, according to a source briefed on the matter.
Its board voted on Wednesday to review alternatives that could include asset sales, a merger or selling the entire business, The Wall Street Journal reported. Bloomberg News reported on Thursday that MF Global was trying to sell the futures business, not the holding company.
The deal struck by euro zone leaders on Thursday to seek to contain the debt crisis helped to ease concern about MF Global's European sovereign debt holdings, and its bonds gained as a result.
MF Global's bonds maturing in 2016 with a 6.25 percent coupon rose to 70 cents on the dollar on Thursday from 67 cents late Wednesday. On Wednesday, they traded as low as 45 cents on the dollar.
MF Global had begun losing market share prior to this week. Its share of registered funds in segregated accounts fell to 4.3 percent in August from more than 6 percent in September 2010, and its total funds have declined more than 15 percent in that period, according to Commodity Futures Trading Commission data.
MF Global brokers continued to operate as normal on the Chicago Mercantile Exchange trading floor on Wednesday.
(Includes reporting from CNBC Reporter Kayla Tausche, Reuters)