MF Global Holdings and its finance subsidiary MF Global Finance USA filed for Chapter 11 bankruptcy protection in the Federal Bankruptcy Court in Manhattan on Monday, marking a major milestone in the fallout from the sovereign debt crisis. The board of directors for both entities says it has “authorized the filing of the Chapter 11 petition to protect their assets”.
In the filing, MF Global revealed that JPMorgan is its biggest creditor, with a claim of $1.2.billion as the trustee on behalf of bondholders, while Deutsche Bank came in second with a $325 million claim.
MF Global listed total debt of $39.7 billion and assets of $41 billion in Chapter 11 papers and it also cited assets of between $100 million and $500 million, and liabilities of between $10 million to $50 million for its finance unit- MF Global Finance USA.
Jon Corzine, MF Global’s chairman and CEO, and former US Senator and governor in New Jersey, allegedly spent the weekend scrambling for a buyer for all or part of the company to save the group that he only took charge of in early 2010.
According to other media reports and primarily The Wall Street Journal, talks with Interactive Brokers on a possible deal broke down earlier on Monday, despite it being the alleged front-runner for making an initial bid of about $1 billion during a court-supervised auction.
It has not been confirmed whether a buyer has been found.
Dire earnings report
On October 25, MF Global revealed a quarterly loss of $191.6 million and high levels sovereign debt.
As of September 30, MF Global had a net long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity (repo-to-maturity), including Belgium, Italy, Spain, Portugal and Ireland.
MF Global said in a statement that its laddered portfolio has an average weighted maturity of October 2012 and an end date maturity of December 2012, which is “well in advance of the expiration of the European Financial Stability Facility in June 2013”.
"Over the course of the past year, we have seen opportunities in short-dated European sovereign credit markets and built a fully financed, laddered maturity portfolio that we actively manage,” says Corzine. “We remain confident that we have the resources and expertise to continue to successfully manage these exposures to what we believe will be a positive conclusion in December 2012.”
Ratings slash
Subsequently, after revealing its results, MF Global faced a severe slash to two of its credit ratings, pulling them down to junk level.
On October 27, Fitch ratings agency placed MF Global Holding on Rating Watch Negative and adjusted MF Global’s Issuer Default Ratings (IDR) to BB+/B from BBB/F2 due to “increased risk taking activities [that] have resulted in sizeable concentrated positions relative to the firm's capital base, leaving MF vulnerable to potential credit deterioration and/or significant margin calls”.
Moody’s Investor Services followed in Fitch’s footsteps the next day and downgraded MF Global Holdings long-term credit ratings to Ba2, which is two levels below the lowest investment grade rating.
However, less well-known but respected ratings agency Egan-Jones said on Friday that MF Global was "to re-establish its business while clients, employees and its business position slides. The major issues are the real losses from poor investments in the EU, whether MF can attract interest in salable assets, and if interested buyers are willing to step up currently or wait until a transaction is potentially blessed by a trustee in a reorganization [in the case of the Lehman Brothers reorganisation, Barclays was confronted with a fraudulent conveyance issue]. The most likely outcome is that the majors will pick off MF key employees and clients will flee. No news is bad news."
Industry takes action
Earlier on Monday, MF Global confirmed that the New York Federal Reserve had suspended MF Global's designation as a primary dealer, in which it was one of the 22 primary dealers authorized to trade US government securities.
"This suspension will continue until MF Global establishes, to the satisfaction of the New York Fed, that MF Global is fully capable of discharging the responsibilities set out in the New York Fed’s policy Administration of Relationships with Primary Dealers, or until the New York Fed decides to terminate MF Global’s status as a primary dealer," said the New York Fed in a statement.
Sources, who wanted to remain unnamed, state that MF traders received emails saying they had to liquidate all trades within 10 minutes.
Meanwhile, exchanges across the globe started to crack down on dealings with MF Global.
In an ICE Futures statement, it said that “effective immediately, and until further notice, ICE Futures US has determined that all customers of MF Global shall be limited to trading for liquidation only”, while NYSE Liffe and the Chicago Mercantile Exchange released similar statements about limiting MF Global Trading to liquidation.
MF Global has yet to return calls or emails to Euromoney on this report.