NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded GFI Group, Inc.'s (GFI) long-term Issuer Default Rating (IDR) and senior unsecured debt rating to 'BB+' from 'B'. Fitch has also removed GFI from Rating Watch Positive and assigned a Positive Rating Outlook. Today's actions follow the purchase of additional GFI shares by BGC Partners Inc. (BGC). Fitch has simultaneously affirmed the 'BBB-' ratings assigned to BGC and its parent Cantor Fitzgerald, L.P. (Cantor) at 'BBB-' with Stable Rating Outlooks.
On April 28, 2015, BGC purchased from GFI approximately 43 million newly issued shares of GFI's common stock at that date's closing price of $5.81 per share for an aggregate purchase price of $250 million. The purchase price was paid to GFI in the form of a note due on June 19, 2018, that bears an interest rate of LIBOR plus 200 basis points. The $250 million note issued to GFI to finance the issuance of new stock is viewed as a debt obligation of BGC on a standalone basis and an interest bearing asset of GFI on standalone basis.
KEY RATING DRIVERS - GFI
The upgrade of GFI's ratings reflect Fitch's view of increased clarity with respect to GFI ultimate ownership structure, as a result of the equity issuance, which appears to mitigate the previous blocking ability of GFI's minority shareholder, Jersey Partners, Inc. As a result of this transaction, BGC now has voting control of GFI, which is expected to allow BGC the flexibility to more actively manage GFI and sell non-core assets as deemed appropriate. Fitch also views the effective defeasance of GFI's 2019 debt maturity via the maturity-matched debt received from BGC positively, although it falls short of an explicit guarantee or assumption of GFI's debt by BGC.
Fitch now views GFI as a strategically important subsidiary of BGC reflecting the majority ownership and voting control of GFI by BGC and the strong financial and strategic synergies between the two companies. As a result, GFI's rating is notched by one notch off of BGC's ratings. Fitch does not yet view GFI as a core subsidiary of BGC, which would result in equalization of the ratings, given the lack of an explicit assumption of GFI's debt obligation by BGC and, at this time, BGC's explicit statement to maintain separately branded operations.
The Positive Outlook reflects the potential for additional steps that may be taken by BGC and GFI over the Outlook horizon which could result in an equalization of the ratings between the two entities, such as a more formal integration of GFI, a more explicit assumption of GFI's debt and/or cessation of operations as separately branded operations.
GFI's standalone leverage, calculated as gross debt divided by adjusted EBITDA, measured 3.7x at Dec. 31, 2014, and interest coverage, measured as adjusted EBITDA divided by interest expense, measured 2.7x as of the same date, which are viewed as consistent with a below investment grade profile on a standalone basis.
KEY RATING DRIVERS - BGC
The affirmation of BGC's ratings reflect the manageable impact on cash flow leverage as result of the $250 million debt issuance and BGC's materially lower credit risk profile, more diversified revenue base and more established franchise in the inter-dealer broker (IDB) space.
Fitch calculates that BGC's standalone pro forma cash flow leverage increases to 2.6x from 1.9x and interest coverage decreases to 7.2x from 8.1x as a result of the debt issuance, while giving no credit to potential cost synergies from the GFI acquisition. Given the overlapping business models of BGC and GFI, Fitch believes some level of cost synergies is achievable, which would further improve leverage and interest coverage levels, all else equal. For example, Fitch expects BGC to seek to act quickly to integrate GFI's back office, technology and infrastructure operations.
KEY RATING DRIVERS - Cantor
The affirmation of Cantor coincides with the affirmation of BGC and maintains the equalization of Cantor's and BGC's ratings, reflecting the meaningful ownership of BGC by Cantor, the voting control Cantor maintains over BGC, and the shared management teams and systems. Cantor's ratings reflect its established position in the middle-market brokerage space, moderate risk profile, controlled leverage, and adequate liquidity levels. Ratings are constrained by the cyclicality of and dependence on capital markets activity for most of Cantor's businesses, and its exposure to non-core ventures, which could potentially introduce financial/reputational risk.
RATING SENSITIVITIES - GFI
The Positive Outlook for GFI reflects the potential for additional steps that may be taken by BGC and GFI which could result in an equalization of the ratings between the two entities, such as a more formal integration of GFI, a more explicit assumption of GFI's debt and/or cessation of operations as separately branded operations. Absent a fundamental change in the relationship between BGC and GFI, GFI's ratings are expected to move in step with any changes in BGC's and Cantor's ratings, and therefore are sensitive to changes in BGC's and Cantor's risk appetites and financial profiles.
RATING SENSITIVITIES - BGC
BGC's Stable Outlook reflects Fitch's expectation that the company will maintain sufficient liquidity for near-term debt maturities/obligations and adequate leverage and interest coverage levels. The Stable Outlook also reflects Fitch's expectation for modest cash flow and margin improvement as a result of integrating GFI's back office operations and rationalizing costs.
Failure to achieve planned cost synergies, inability to sustain EBITDA or reduce debt levels, which leads 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 impact the company's liquidity before the successful integration of GFI would also be viewed negatively from a rating perspective. BGC's ratings are equalized with those of its parent, Cantor, as Fitch considers BGC to be a core subsidiary of Cantor due to the significant operational and financial linkages between the two companies. As a result, any changes in Cantor's ratings could also result in changes to BGC's ratings.
Positive rating momentum, although limited in the medium term, could be driven by the successful integration of GFI and a sustained increase in profit margins, while maintaining conservative leverage and interest coverage metrics.
RATING SENSITIVITIES - Cantor
Cantor's ratings could come under pressure as a result of deteriorating operating performance in its core institutional brokerage, a material increase in leverage levels, adverse changes in the reverse repurchase book composition, material loss or reputational damage from Cantor's non-core ventures and/or key man risk associated with Cantor's CEO would also pressure ratings. Ratings also remain sensitive to changes in BGC's ratings.
Cantor has a $300 million debt maturity on June 26, 2015. While refinancing has not yet occurred, Fitch views Cantor as having acceptable financial flexibility at present in order to address this maturity. Although not anticipated by Fitch, were Cantor to experience challenges refinancing or repaying this debt maturity, its ratings, and thus those of BGC and GFI, could be negatively affected.
Positive rating momentum, although limited in the near term, could 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 addressing key man risk and maintaining moderate risk appetite, low leverage, and sufficient capital.
Fitch has taken the following rating actions:
GFI Group Inc.
--Long-term IDR upgraded to 'BB+' from 'B'; Outlook Positive;
--Short-term IDR affirmed at 'B';
--Senior unsecured debt upgraded to 'BB+' from 'B'.
BGC Partners, Inc.
--Long-term IDR affirmed at 'BBB-';
--Senior unsecured debt rating affirmed at 'BBB-';
--Short-term IDR affirmed at 'F3'.
Cantor Fitzgerald, L.P.
--Long-term IDR affirmed at 'BBB-';
--Senior unsecured debt affirmed at 'BBB-';
--Short-term IDR affirmed at 'F3'.
Additional information is available on 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Non-Bank Financial Institutions Rating Criteria' (April 2015);
--'2015 Outlook: Securities Firms' (November 2014);
--'Inter-Dealer Brokers: Challenges and Opportunities from New Regulations (October 2013).
Applicable Criteria and Related Research:
Global Non-Bank Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351
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
Inter-Dealer Brokers: Challenges and Opportunities from New Regulations
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719682
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984216
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.