Fitch Revises Rating Watch to Positive on GFI's 'B' Rated Debt on Completion of BGC Tender Offer
At the expiration of the tender offer on Feb. 26, 2015, BGC owned approximately 56.3% of GFI's outstanding common shares, exceeding its minimum tender offer of 43%, and had gained effective control of GFI by appointing six directors to the expanded eight-member GFI board. As a result, all outstanding conditions of BGC's tender offer were reportedly met. Effective immediately, GFI will be a controlled company and will operate as a separately branded division of BGC reporting to the president of BGC, and its financial results are expected to be consolidated as part of BGC.
KEY RATING DRIVERS - IDRS AND SENIOR DEBT
The revision of the Rating Watch to Positive from Evolving reflects Fitch's expectation that GFI's ratings may ultimately be equalized with those of BGC and Cantor, depending on how the ownership structure between BGC and GFI evolves over the near term and whether or not GFI's debt is ultimately assumed by BGC. BGC is rated 'BBB-'. Outlook Stable, reflecting its materially lower credit risk profile, more diversified revenue base and more established franchise in the inter-dealer broker (IDB) space.
Although Fitch expects BGC to maintain effective control of GFI and drive its future strategic direction, a formal merger of the two companies cannot occur until two-thirds of GFI's outstanding shares have been acquired by BGC. Jersey Partners Inc. (JPI), which owns 36.4% of GFI's shares, has entered into a support agreement with the CME Group (CME) to not sell their shares until one year from the CME merger termination date (Jan. 30, 2015) which means that a formal BGC-GFI merger cannot occur at this time. As a result, BGC will not be formally assuming GFI's outstanding debt at the close of the tender agreement.
GFI's stand-alone leverage, calculated as gross debt divided by adjusted EBITDA, measured 3.34x for the trailing 12 months (TTM) ending Sept. 30, 2014, and interest coverage, measured as adjusted EBITDA divided by interest expense, measured 2.32x as of the same date.
Fitch calculates that the combined companies' leverage and interest coverage improve to 1.97x and 5.79x, respectively, pro forma for BGC's \$150 million of convertible notes paydown in April 2015, factoring in run-rate EBITDA from BGC's recent acquisitions, including Apartment Realty Advisors, RP Martin, Cornish and Carrey, HEAT, and Remate, 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.
GFI's cash position, which it defines as cash, cash equivalents and cash held at clearing organizations excluding customer cash, measured \$222.9 million at Sept. 30, 2014. A significant portion of this cash is restricted for regulatory and clearing capital needs, which Fitch believes will be duplicative under BGC's ownership and could be freed up over time, thereby generating additional liquidity. GFI management has represented that there is no impact on change on control provisions in GFI's senior notes as a result of BGC gaining control of GFI.
RATING SENSITIVITIES - IDRS AND SENIOR DEBT
Fitch expects to resolve the Rating Watch once there is more clarity with respect to the ultimate ownership structure between BGC and GFI and whether or not GFI's debt is ultimately assumed by BGC. This could coincide with the expiration of the JPI support agreement with CME, or at an earlier date, should other organizational changes be affected which result in a more formal assumption of GFI's debt obligations by BGC.
Absent more clarity with respect to the ownership structure, Fitch may elect to resolve the Rating Watch on the basis of an evaluation of the strategic importance of GFI to BGC, consistent with Fitch's rating criteria entitled 'Rating FI Subsidiaries and Holding Companies' dated Aug. 10, 2012. Under these criteria, ratings assigned to subsidiaries may be equalized with their parent's ratings, notched down from their parent's ratings, or determined on a stand-alone basis, depending on Fitch's assessment of the willingness and ability of the parent to extend support to the subsidiary.
Fitch revises the following ratings to Rating Watch Positive from Rating Watch Evolving:
GFI Group Inc.
--Long-term IDR 'B';
--Short-term IDR 'B'.
--Senior unsecured debt 'B'.