Lucas Jackson/ReutersMF Global, run by Jon Corzine, is losing investors concerned about the firm’s ties to $6.3 billion in European debt.
Jon S. Corzine’s return to Wall Street has run into a wall of turbulence.
Shares of his firm, the commodities and derivatives brokerage house MF Global, have plummeted 54 percent so far this week amid concerns about the firm’s exposure to European sovereign debt. On Wednesday, the price of its five-year bonds slumped to 66.5 cents on the dollar, and the upfront premium of insuring $10 million of its debt annually climbed to $4.7 million, from about $3.9 million on Tuesday.
Worries about Europe have buffeted other American financial firms in recent months, but MF Global is showing signs of becoming the first to face a full-blown panic. Investors began running to the exits after Moody’s Investors Service on Monday cut its ratings on the company to one notch above junk status and Standard Poor’s on Wednesday threatened a downgrade. A ratings reduction below investment grade would hurt the company’s futures clearing business, analysts said.
Both ratings agencies said they were concerned about MF Global’s capital position given its exposure to $6.3 billion in debt from Italy, Spain, Belgium, Ireland and Portugal — among the most troubled economies that use the common currency of the euro.
S.P., noting that the debt amount is 5.2 times the company’s total equity, said, “We consider this exposure to be very high, compared to the company’s loss absorbing capital base.” Earlier this month, MF Global disclosed that a regulator, the Financial Industry Regulatory Authority, had ordered it in August to set aside additional capital. Moody’s said the debt exposure and the need to inject capital highlighted “the firm’s increased risk appetite and raises questions about the firm’s risk governance.”
“It appears that there’s been a dramatic loss of investor confidence,” Richard Repetto, an analyst with Sandler O’Neill Partners, said.
While investors have been fleeing, it is not clear whether its clients are staying put. After the Moody’s downgrade on Monday, MF Global’s chief financial officer, Henri Steenkamp, sent a note to customers discussing the firm’s financial stability.
The firm’s woes pose a huge test for Mr. Corzine, who joined it only last year with a grand vision: to remake the four-year-old brokerage into a smaller version of his former employer, Goldman Sachs. One of Mr. Corzine’s big initiatives at MF Global was to make more trades using the firm’s own capital, a potentially more lucrative business than simply trading for clients. But regulators and analysts said that so-called principal trading bore high risks and required the firm to hold more capital.
MF Global responded this past quarter by paring back its principal trading, leading to a 73 percent drop in that unit’s revenue from the same time last year. That, coupled with volatile markets, contributed significantly to the firm’s reporting a quartelry loss of $186 million on Tuesday.
MF Global has now hired Evercore Partners as one of potentially several advisers on strategic options, including a potential sale, according to a person briefed on the matter who was not authorized to speak publicly.
A sale would almost certainly mean an abrupt exit for Mr. Corzine, age 64. His entrance, shortly after losing his bid to remain governor of New Jersey, generated enormous interest in what had been a respectable but small financial player. MF Global put such a premium on his presence that this summer, it included a “key man” provision in the sale of $325 million worth of bonds. Should Mr. Corzine leave to join the Obama administration by July 1, 2013, it agreed to pay a higher interest rate on the notes.
Now, his reputation is intertwined with MF Global’s fate.
“This is Corzine’s legacy, and this is where he’s got to step in,” Mr. Repetto said. “If you have a dominant leader like that, he needs to step in and reinvigorate the business and reassure investors and clients.”
Still, in considering a sale, MF Global is likely to look for a better-financed partner that could allay concerns about its risks. With the recent stock slide, the company has a market value of a little more than $280 million.
It is unclear what other options MF Global may seek. It has no debt payments due in the near term, though if Europe’s worst case — multiple countries defaulting — were to happen, the firm’s equity could be wiped out by its debt holdings.
One possibility is that J.C. Flowers Company, the private equity shop where Mr. Corzine is a limited partner, could help arrange a recapitalization. J.C. Flowers, whose founder is a Corzine protégé, holds about a 6.8 percent stake in the firm.
A spokeswoman for MF Global, Tiffany Galvin, declined to comment.
Formally created in 1981 as part of the Man Group, the British hedge fund giant, MF Global has long focused on a relatively unheralded part of the financial world: brokering trades in commodities and derivatives like futures contracts. It grew in large part through acquisitions, including the purchase of assets from Refco in 2005.
But since its spinoff from the Man Group in 2007, MF Global had to contend with concerns about its risk management and its size. In February of 2008, the firm disclosed that an employee who was trading in the wheat futures market in his personal account had substantially exceeded his personal limit. The breach led to a $141.5 million debt charge and millions of dollars in fines.
Weeks later, MF Global’s stock plunged after the sale of Bear Stearns, after investors questioned whether it could survive because of its small size.
Mr. Corzine’s arrival last year heralded a potential renaissance for the firm. As Goldman’s chief executive from 1994 to 1999, he led the banking titan’s responses to several challenges, including the Asian financial crisis and the collapse of the Long-Term Capital Management hedge fund. His crowning achievement was Goldman’s initial public offering in 1999, though the controversial move led to a power struggle that ultimately cost him his job.
At MF Global, Mr. Corzine devised a plan that cut costs and laid off staff even as the firm took on more trading risks to lift profits. And it remains a leader in the futures broker-dealer area.
But the firm’s holdings of European sovereign debt have prompted concerns among analysts that MF Global faces a capital shortfall. It has already sought to bolster its capital positions to satisfy regulators.
But Mr. Repetto said that MF Global did not face an immediate crisis as a result of its debt exposure, noting that the firm could rely on the European Financial Stability Facility as a backstop.
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