This morning, MF Global filed for Chapter 11 bankruptcy protection in SDNY. For those interested in following along, the Claims Agent page can be found here:
"Federal regulators have discovered that hundreds of millions of dollars in customer money have gone missing from MF Global in recent days, prompting an investigation into the company’s operations as it filed for bankruptcy on Monday, according to several people briefed on the matter.
The revelation of the missing money scuttled an 11th hour deal for MF Global to sell a major part of itself to a rival brokerage firm."
- Holding Company Bonds: 1.875% converts, 9% converts, 6.25% senior uns (priced in August!), 9% senior uns (NOT guaranteed by subsidiaries)
- Extended and Non-Extended Revolver (2014 and 2012 respectively) (NOT guaranteed by broker dealer, but issued out of MF Global Finance USA Inc and the holding company as co-borrower )
- Secured Revolver of 2012 (at the broker dealer, and also guaranteed by holdco and intermediate holdco)
On September 1, 2011, MF Holdings announced that FINRA informed it that its regulated U.S. operating subsidiary, MFGI, was required to modify its capital treatment of certain repurchase transactions to maturity collateralized with European sovereign debt and thus increase its required net capital pursuant to SEC Rule 15c3-1. MFGI increased its required net capital to comply with FINRA’s requirement...
Dissatisfied with the September announcement by MF Holdings of MFGI’s position in European sovereign debt, FINRA demanded that MF Holdings announce that MFGI held a long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity, including Belgium, Italy, Spain, Portugal and Ireland. MF Holdings made such announcement on October 25, 2011. These countries have some of the most troubled economies that use the euro. Concerns over euro-zone sovereign debt have caused global market fluctuations in the past months and, in particular, in the past week. These concerns ultimately led last week to downgrades by various ratings agencies of MF Global’s ratings to “junk” status. This sparked an increase in margin calls against MFGI, threatening overall liquidity.
"Now let me turn to a subject which has understandably clouded perceptions with respect to our profits, that is our repurchase to maturity sovereign positions as noted on slide five. As we have pointed out over the past year in our disclosures and quarterly calls, we have taken advantage of the dislocations in the European sovereign debt market by buying short dated debt in European peripherals and financing those securities to their exact maturity date. Therefore, the term repoed to maturity.
The spread between interest earned and the financing cost of the underlying repurchase agreement has often been attractive even as the structure of the transaction themselves essentially eliminates market and financing risk. At the inception of these positions, we made the judgment that the securities we financed to maturity would repay, given their high credit rating and short duration – that is all securities mature before 12/31/2012 – and later reinforced by the commitments of European and international institutions in supporting the solvency of the issuing countries. Again, in the timeframe of our exposures, the full RTM portfolio we hold is seen on slide five. We specifically tiered the maturity of our holdings to reflect credit ratings at the time of inception, and reassessed our risk based on the EFSF and IMF support programs, that significantly enhanced the probability and the ability of Portugal and Ireland to meet their obligations on schedule, again, within the context of their maturities, in Ireland and Portugal's case, June 2012.
The positions in our portfolio of higher rated countries, Italy, Spain and Belgium, have also benefited from support from European institutional actions, although not direct solvency packages. These same countries' credit positions are now the subject of the ongoing public debates taking place regarding future systemic support from the European community. Again, in the maturity timeframe of our holdings, 12/31/2012, we expect any of the actions proposed to give additional support to an already strong probability and ability of these nations to meet their obligations.
So, in short, our judgment is that our positions have relatively little underlying principle risk in the timeframe of our exposure. We continually reassess that judgment and are prepared to take offsetting actions if conditions or circumstances change. We are not adding to this portfolio and we will allow it to roll off as the staggered maturities are reached. I would also note that we carry little exposure to these countries' banking systems and no derivative exposures dependent on a country's credit worthiness.
In addition, consistent with prior quarters, there is no mark-to-market associated with the derivative value of these positions.