Key-man Corzine unlocks value for MF Global

by Timothy Sifert and Andrea Johnson

NEW YORK, Aug 4 (IFR) - Since spinning off from Man Group plc in 2007, MF Global has had a tough time of it. But after reporting its first profitable quarter in a year and pricing a difficult bond offering, the broker-dealer looks on its way to better days, thanks in part to one key appointment last year.

Almost immediately after naming former New Jersey governor and Goldman Sachs <GS.N> chief Jon Corzine to be CEO in March 2010, MF Global <MF.N> started to show signs of improvement. Costs were cut and revenues were increased, bringing profits closer to hand.

This fact was not lost on potential bond investors, who -- before the key appointment -- had made it prohibitively expensive for MF Global to raise funds in the high-grade market.

To put investors at ease this time around MF Global took an unusual tack in marketing its US$325m offering of five-year notes on Tuesday. Twice bitten by failed attempts, the firm wasn't too shy to give investors what they wanted.

The bond agreement includes a key-man covenant. Should Corzine depart his executive post before July 1 2013 as the result of being appointed to a federal position by the President of the US, the interest rate on the notes will increase by one percentage point.

While that will only give investors another US$3.25m collectively, its inclusion in the filing made a difference. It's important to note that investors won't be compensated if the chief exits for any other reason. President Obama, investors are aware, is reportedly considering Corzine for Treasury Secretary.


By MF Global's estimation, it won't have to pay up at all.

"Jon has not been made any offers," a spokeswoman said. "The underwriters included the key man event covenant in the prospectus to address investor questions. Jon has made it clear to MF Global's investors, clients and employees that he is committed to being here well beyond the terms of the covenant."

Nonetheless, the covenant and the company's financial history made it more difficult for lead arranger Jefferies to zero in on pricing. The trade took two days to wrap up. No other deals this week took more than one session.

Whispers were quoted in a couple of forms, Treasuries plus 500bp area and 6.25%-6.50%. The five-year closed at 1.217% on Tuesday.

Eventually, price talk came out based on spread and mirroring whispers, at plus 500bp area. However, the deal launched based on yield, at 6.25%. On Wednesday, the tranche printed with a 6.25% coupon at par to yield 501.6bp over the 1.50% five-year Treasury due July 31 2016.

For all the ballyhoo over the Corzine clause -- and its political, professional and financial implications -- investors still relied on traditional credit work. Even without the future stewardship of the CEO, MF global still has a lot to recommend it, the attractive new-issue premium notwithstanding.


The pricing of the bond on Wednesday was the culmination of a lot of work, going back several years when Corzine was still serving as New Jersey's 54th governor.

On June 27 2007, MF Global filed for what was to be its first bond offering, via Citigroup and JP Morgan, shortly after spinning off from parent Man Group plc through a US$2.9bn initial public stock offering. The fundraising was to include five-year notes due 2012 and 10-year notes maturing in 2017.

Sensibly, proceeds were to be used to pay down a US$1.4bn 364-day revolving bridge loan, also arranged by Citigroup and JP Morgan, that was incurred as a result of the spin-off. It took months, but executives finally scheduled a road show to kick off on February 4 2008.

However, a new issue was not to be: that same month the company discovered that a rogue trader had incurred a US$141.5m loss trading in wheat futures. MF Global had to record a bad debt provision for the full amount, about 6.00% of total equity, and a bond offering was put on hold.

Indeed, the fallout from the loss was enough of a setback that the company issued a press release on March 19 to say "that repeated rumors regarding its liquidity position are without merit." At the time, it said it had close to US$1.4bn in unused committed loan facilities.


Two months later, and about a year after the spin-off, the company was busy repaying and refinancing the full amount of the bridge, though it didn't use the unsecured bond market to do so.

It took out the bridge by drawing US$350m in cash from an existing five-year revolver and using proceeds from a US$300m, JC Flowers-backed sale of convertible bonds and US$300m in cash on hand. The remainder of the US$1.4bn was refinanced through a new US$450m two-year credit facility. By November 2008, the firm had repaid the final portion of the bridge and boasted US$2.8bn in total capital.

The company didn't return officially to announce a senior unsecured bond until Thanksgiving week 2009, this time through JP Morgan, sole books. Price talk wasn't released but whispers were circulating in the 10% area, indicating a spread of about 665bp over Treasuries for the US$250m 10-year security. That week some pricing comparables were quoted with about half the spread. The bonds proved too rich for MF Global.


MF Global needed to make some changes and appointed Corzine, who had recently lost his bid for re-election to Chris Christie, as chairman and CEO in March 2010.

The firm then announced it was undertaking a close review of its cost base, including its compensation structure and non-compensation expenses.

Corzine had a lot of work to do. On May 20 2010, MF Global reported a GAAP net loss to common shareholders for full-year 2010 of US$167.7m, versus a net loss of US$69.7m in fiscal 2009. To address the problem, it implemented a global hiring freeze and planned to reduce the workforce by as much as 15% in the first fiscal quarter of 2011, among other measures.

Corzine was all about cost cutting, including on interest expenses. On June 2, the company priced a US$160m common stock offering through JP Morgan, Citigroup and Deutsche Bank to fund the cash premium of an exchange offer for 9.00% convertible senior notes due 2038 and 9.75% non-cumulative convertible preferred stock.

On June 29 2010, MF Global won some breathing room on its debt maturity profile. It amended the US$1.2bn credit facility (which the proceeds of Wednesday's bond offering went to pay down). The amendment pushed out the maturity by two years to June 15, 2014 for US$690m in commitments, while about US$511m of loan commitments remained available until 2012.

On August 5 that year, MF Global reported first-quarter earnings, its first under the Corzine regime. The company totted up US$0.8m in net income, compared to a net loss of US$32.8m in the same 2010 period.

Quarterly revenue grew 6.59% to US$289.4m year over year, and the compensation ratio fell to 53.7% from 63.2% a year before. Headcount decreased by about 12%.

However, MF Global was not to report net income for another year.

On July 28 2011, the firm reported 18% net revenue growth for the first quarter of fiscal 2012, and GAAP net income of US$7.7m. Hot on the heels of the earnings report, which analysts generally viewed positively, the company priced a new US$325m, seven-year convertible bond to repay part of the borrowed portion of the US$1.2bn loan.

The proceeds from Wednesday's senior unsecured bond offering, meanwhile, were also used to repay the revolver.


The Corzine covenant aside, the deal had another peculiarity: Jefferies <JEF.N> was tapped to lead the trade, without the help of any of MF Global's usual relationship banks.

Because Jefferies was a somewhat unlikely choice to land a difficult credit into the market, there was speculation that MF Global was a bought deal. Competitors couldn't imagine how an up-and-comer like Jefferies was tapped by a firm helmed by an ex-Goldman chief to place a deal that had given much larger investment banks so much trouble.

But a banker at one of MF Global's usual relationship banks -- not Jefferies -- pointed to Jefferies' success with GFI Group, another brokerage-related credit that had investors scupper its initial plans in the high-grade market.

On July 14 this year Jefferies placed a US$250m offering of seven-year notes for Ba2/BBB-/BBB rated GFI <GFIG.O>, after Bank of America Merrill Lynch and Barclays Capital -- for a host of reasons -- had to pull an earlier attempt at a 10-year trade for GFI.

Beyond the GFI precendent, Jefferies' ability to focus on the credit was also important.

"Most deals are sold on relative value. Deals like this can't be done that way. It's a credit story that takes a lot of explaining," said one source.

"Jefferies isn't juggling multiple deals in the market. All of its attention was on MF Global. The Jefferies sales force on this trade was fully focused and fully educated, and I think that's what got the deal done. The key man clause was also clever. Corzine always says he's committed to the business, but this way you didn't have to take his word for it."

Nonetheless, whatever placement prowess Jefferies might have had, the bond did end up pricing with a wallop of a new issue premium. At Treasuries plus 501.6bp, the spread was more in line with split-rated credits.

But rewarding investors for taking a chance with an iffy credit now might pay off for MF Global in the future. No doubt, as it expands into a more full-service firm, MF Global is going to need to return to high-grade bond investors -- with or without Jon Corzine at the wheel.

(Reporting by IFR senior reporter Timothy Sifert; Additional reporting by IFR senior analyst Andrea Johnson; Editing by Ciara Linnane)