Fitch Expects to Rate BGC's Senior Unsecured Notes 'BBB-'

NEW YORK--()--Fitch Ratings expects to assign a 'BBB-' rating to BGC Partners, Inc.'s (BGC) announced issuance of $300 million 5 3/8% notes due December 2019. The notes will rank pari passu with all existing senior unsecured notes.

Proceeds from the issuance are expected to be used to pre-fund a $150 million April 2015 debt maturity, to fund all or part of BGC's tender offer for GFI Group Inc.'s (GFI) shares, to fund strategic alliances and acquisitions and for general corporate purposes.

KEY RATING DRIVERS - Senior Unsecured Debt

The expected rating reflects the modest impact on BGC's cash flow leverage and interest coverage ratios, the company's strong liquidity position, and its track record of accretive acquisitions.

BGC's leverage, as measured by gross debt to adjusted EBITDA, excluding the non-cash, non-dilutive, partnership unit-exchange-related charges, was 1.60x for the trailing 12 months (TTM) ending Sept. 30, 2014, compared to 2.22x at year-end 2013 (YE2013). Interest coverage, as measured by adjusted EBITDA to interest expense, was 7.08x at TTM Sept. 30, 2014, compared to 4.98x at YE2013. The improvement in both metrics was due to increased EBITDA generation.

Pro forma for the debt issuance, taking into account the debt retirement in April 2015, but giving no credit for additional EBITDA generation, Fitch calculates that leverage will increase to 2.15x, which is closer to Fitch's 2.50x maximum threshold for the 'BBB' rating category. Under the same scenario, interest coverage is calculated to decrease to 6.62x, which is closer to Fitch's 6.00x minimum threshold for the 'BBB' rating category.

Should BGC be unable to sustain or increase existing EBITDA levels, this could potentially pressure the ratings. Conversely, continued improvement in financial performance and accretive acquisitions would afford BGC additional financial flexibility. For instance, factoring in run-rate EBITDA from recent acquisitions, including the recently announced acquisition of Apartment Realty Advisors, pro forma leverage modestly increases to 1.92x and interest coverage improves to 7.42x.

BGC has represented that a portion of the debt proceeds are intended to be held for the purposes of executing on the company's cash tender offer to acquire GFI's remaining shares for $5.25 per share. The offer is scheduled to expire on Dec. 9, 2014, unless extended. Fitch recognizes there may be benefits from the transaction as it would consolidate two of the top five inter-dealer brokers (IDBs), reducing competition and creating potential cost synergies, particularly at a time when the operating environment for IDBs remains challenged due to subdued trading volumes. On the flip side, paying a material premium for the transaction may diminish the benefits of consolidation.

BGC reported improved 3Q'14 results, with both the IDB and real estate (RE) brokerage business reporting y-o-y revenue/earnings growth. Consolidated revenues, on a distributable earnings (DE) basis, were up 8.5% to $449.8 million in 3Q'14, from $414.4 million in 3Q'13. The increase was driven mainly by increased contribution from the RE business, which partially benefited from its acquisition of Cornish & Carey in August 2014. Pre-tax DE increased by 75% to $65.8 million in 3Q'14, from $37.4 million in 3Q'13, driven by growth in the high-margin fully electronic trading businesses and reduced non-operating expenses. The increase also slightly benefited from a higher NASDAQ stock-related earnout, which is marked to market.

BGC continues to carry considerable liquidity on its balance sheet, primarily the result of proceeds received from its sale of the eSpeed business to NASDAQ in 2013, despite three acquisitions (HEAT Energy Group, Remate, and Cornish & Carey). Total liquidity, which includes cash, cash equivalents, marketable securities, and securities owned, but excludes the $92.4 million investment in GFI stock given the correlated nature of this investment to BGC's financial performance, totalled $532.3 million at the end of Sept. 30, 2014. Liquidity is expected to temporarily increase following the proposed notes issuance; however, Fitch expects the company to earmark a portion of liquidity to repay $150 million of debt due in April 2015 and for accretive acquisitions, such as the recently announced purchase of multi-family real estate broker Apartment Realty Advisors.

RATING SENSITIVITIES - Senior Unsecured Debt

The expected debt issuance could potentially increase BGC's leverage and reduce its interest coverage to levels closer to Fitch's tolerance for the 'BBB' rating category. Failure to invest excess debt proceeds in accretive acquisitions or sustain recent EBITDA levels which lead leverage to increase above 2.5x or interest coverage to fall below 6x, on a sustained basis will have a negative impact on ratings.

Increased shareholder-friendly activities, including increased dividends or outsized share buybacks that materially reduce the company's liquidity, before its April 2015 debt maturity would also be viewed negatively from a rating perspective.

Positive rating momentum is viewed as limited in the medium term, given uncertainty surrounding the outcome of the GFI tender offer as well as broader industry challenges and structural changes in the IDB space. Longer-term, positive rating momentum could be driven by successful deployment of excess cash proceeds, and sustained improvement in leverage, interest coverage and profitability metrics. Finally, any changes in BGC's parent, Cantor Fitzgerald L.P.'s ratings could also result in changes to BGC's ratings, given the significant operational and financial linkages between the two companies.

Fitch expects to assign the following rating:

--Proposed $300 million senior unsecured notes due 2019 at 'BBB- (exp)'.

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);

--'2015 Outlook: Securities Firms (November 2014).

Applicable Criteria and Related Research:

2015 Outlook: U.S. Securities Firms (Solid Liquidity and Capital Offset Economic Challenges)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809948

Securities Firms Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732556

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=944635

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Contacts

Fitch Ratings
Primary Analyst
Mohak Rao, CFA
Director
+1 212 908-0559
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Tara Kriss
Senior Director
+1 212 908-0369
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Mohak Rao, CFA
Director
+1 212 908-0559
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Tara Kriss
Senior Director
+1 212 908-0369
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com