Are we are about to see the second failure of the current eurozone financial crisis with a big US broker struggling to survive?

MF Global, the highly leveraged parent of an Australian equities, commodities futures broker and Contracts For Difference seller, is on the verge of collapse and is being hawked around New York for a possible sale, according to media reports from New York.

If it fails and or is sold, it  would join French-Belgian bank Dexia as a victim of the latest crisis in Europe.

The looming sale of MF Global is being watched closely here by regulators including APRA, ASIC, the ASX and The Reserve Bank. Talks were held in New York over the weekend with a view to getting a sale done by the time trading opened in Asian markets today. So far this morning there has been no announcement.

Private equity firm J.C. Flowers, which has a stake in MF Global, is also in talks about possibly taking it private, The Wall Street Journal reported yesterday. It and other media reports have said Macquarie Group had looked at MF Global, along with several mainstream US banks, including Goldman Sachs.

“In the US, MF Global is the eighth-largest handler of futures trades with $7.3 billion in customer funds on deposit as of August 31, according to data collected by the Commodity Futures Trading Commission. It is the largest such firm not owned by a bank and it is the product of around 20 acquisitions.

“For the quarter ended September 30, MF Global generated 54% of its revenues, about $107 million, from executing and clearing transactions for clients, which include hedge funds, individual investors and sovereign entities. Its brokerage business is largely split between trading services offered to institutional clients, and a smaller division focused on retail-level investors that chief executive Jon Corzine this year has worked to streamline and expand,” the Journal reported.

It owes billions of dollars, possibly as much as $US9 billion or more to clients and lenders and others. Its problems have been brought on by the stepped-up volatility surrounding the eurozone crisis. MF Global’s shares collapsed last week, shedding around two third its value on the New York Stock Exchange. They closed at $US1.20 on Friday, which valued the company at about $US198 million. It had been valued at more than $US660 million at the start of the week (which was half its book value at September 30 anyway).

MF Global owns $US6.3 billion of Italian, Spanish, Belgian, Portuguese and Irish debt, the company said in a presentation accompanying its October 25 quarterly report, which disclosed the surprise loss. It has pledged this in repurchase deals with various other groups and has been forced to allocate more capital to maintain its position.

The company’s bonds were trading in the mid-40s, which implies a high possibility of default. They hit a low in New York of 38 cents on the dollar. That was down from Thursday when the bonds, maturing in 2016 with a 6.25% coupon, were at 70. MF Global had offered the notes at par (100 cents) in August. In other words they have lost more than 50% of their value in around two months, which would have to be close to a recent record.

But the killer has been the 33.3 times leverage: at September 30 it had $US1.232 billion of capital and total assets of $41.04 billion. That means a 3% drop in the value of those assets, especially the $US6.3 billion of the European sovereign bonds, would wipe out that company. It had already marked down their value by 21% to take account of the July bailout deal of Greece. Last week’s deal increased that loss to 50%, meaning more losses for MF Global.

By some reckoning the write-down of just over $US3 billion in the value of the debt would bankrupt the company, hence the crisis that accelerated from last Thursday as investors put together the two credit rating downgrades, the third quarter loss and the impact of the latest eurozone deal and said they made MF Global’s financial position precarious indeed.

According to its Australian website, “MF Global Australia Ltd (MFGA) is one of Australasia’s premier brokers providing a full range of financial products and services. The products offered include futures, options on futures, foreign exchange (Margin FX), Contracts For Difference (CFDs) and equities.

“MFGA is totally dedicated to serving the needs of our customers and, to that end, focuses on providing a high level of specialised and personal service. Our highly experienced broking teams, coupled with our state of the art trading platforms, provide the trader with everything they need in a competitive market. Our 24-hour dealing room is staffed with experienced personnel conversant in many international languages, providing a trading service to a diverse client base across all world time zones.

“Over the years MFGA has been able to deliver a consistently high level of service and professionalism whilst meeting customer requirements. This is in great part due to the stability of its management, broking, trading and administration teams. These factors provide the basis for MFGA’s outstanding reputation for integrity and honesty.”

Stability is obviously a relative term given the plunge in the company’s shares last week and the collapse in the value of its recently issued bonds.

According to a filing with the US Securities and Exchange Commission, MF Global said that “As of September 30, 2011, the company has over $3.7 billion in available liquidity, including $1.3 billion in available committed revolving credit facilities and $2.5 billion in total capital.” But it also said that it had been ordered to find more capital to some of its trading positions.

“The company does not believe that the increase in net capital will have a material adverse impact on its business, liquidity or strategic plans. In addition, the company expects that its regulatory capital requirements will continue to decrease as the portfolio of these investments matures, which currently has a weighted average maturity of April 2012 and a final maturity of December 2012,” MF Global said.

That is no longer the case, the company will not be around at April of next year, let alone December.

MF Global was the brokerage segment of Man Group until 2007, when the business decided to split the investment and brokerage businesses so they could each focus on their own markets. An IPO was done for the brokerage business, which was renamed MF Global to distinguish it from the investment business that remained as Man Group, which is a big manager of alternate investments, such as hedge funds. John Corzine, who became CEO in March of last year, is a former US Senator, Governor of New Jersey and boss of Goldman Sachs.

Peter Fray

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