NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Cantor Fitzgerald, L.P.'s (Cantor) long- and short-term Issuer Default Ratings (IDRs) at 'BBB-/F3'. The Rating Outlook is Stable.
KEY RATING DRIVERS - IDRs AND SENIOR DEBT
The affirmation reflects Cantor's established position in the middle market brokerage space, moderate risk profile, controlled leverage, and adequate liquidity levels. Ratings are constrained by the cyclicality and dependence on capital markets activity for most of its businesses, and its exposure to non-core ventures which could potentially introduce financial/reputational risk.
Cantor's operating performance in its core institutional business, excluding BGC and Cantor Commercial Real Estate (CCRE), weakened in 2013 and first quarter 2014 (1Q'14), due to continued challenging conditions in the debt capital markets (DCM) business and increased costs associated with Cantor's expansion efforts into other businesses. On a consolidated basis, Cantor was profitable in 2013, helped by contribution from CCRE and the gain on sale (nonrecurring) of the eSpeed business at BGC. Pre-tax income and margins in 1Q'14 improved over 1Q'13, helped by contribution from BGC, CCRE, and proceeds (nonrecurring) received from Cantor's settlement with American Airlines over the 9/11 lawsuit.
Fitch expects operating performance to be pressured in 2H'14 as market conditions affecting the institutional brokerage business continue.. Sustained decline in the core institutional business revenues, without offsetting cost declines, could pressure the ratings.
Cantor's controlled use of leverage has been the supporting the strength of its ratings. Adjusted leverage ratio (defined as assets-reverse repurchase/equity), excluding the CCRE business, has consistently been at the lower end of management's articulated target of 8.0x to 12.0x, which compares favorably to its peers. Fitch adjusts the leverage for reverse repurchases as Cantor operates a matched repurchase book to provide financing for its customers as well as its assets/inventory, which is primarily (98%) backed by U.S. government Treasuries, agencies and agency MBS.
Liquidity at the parent level has declined year-over-year due to increased regulatory requirements, expansion efforts, and challenging operating conditions in its core institutional brokerage business, as earnings contribution from BGC and CCRE are limited by Cantor's minority stakes in these two entities. Fitch notes that Cantor faces a $300 million debt maturity in June 2015, which could potentially introduce liquidity/refinancing risk, particularly if core operating performance continues to be stressed. Cantor is expecting $150 million from the convertible note it issued to BGC, which is due in April 2015. However, the company will have to generate liquidity or refinance a portion of its upcoming debt maturity. Fitch will monitor Cantor's liquidity in the next few quarters and a failure to generate adequate liquidity would pressure the ratings.
RATING SENSITIVITIES - IDRS AND SENIOR DEBT
Cantor's ratings could come under pressure if operating performance in its core institutional brokerage business continues to deteriorate, and it is unable to maintain adequate liquidity levels over the next few quarters. Ratings remain sensitive to material increase in leverage levels, adverse changes in the reverse repurchase book composition, and/or material loss or reputational damage from Cantor's noncore ventures. Ratings also remain sensitive to changes in BGC's ratings.
Positive rating momentum, although limited in the near term, will be driven by sustained improvement in core institutional brokerage business margins, increase in parent company liquidity levels, sale or closure of some non-core and non-viable ventures, while maintaining moderate risk appetite, low leverage, and sufficient capital.
The ratings were affirmed as follows:
Cantor Fitzgerald, L.P.
--Long-term IDR at 'BBB-';
--Senior unsecured debt at 'BBB-';
--Short-term IDR at 'F3'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (January 2014);
--'Securities Firms Criteria' (January 2014);
-- 'Rating FI Subsidiaries and Holding Companies' (August 2012);
--'2013 Outlook: Securities Firms (November 2013).
Applicable Criteria and Related Research:
2013 Outlook: U.S. Securities Firms
Securities Firms Criteria
Rating FI Subsidiaries and Holding Companies
Global Financial Institutions Rating Criteria