MF Global bonds rally on hopes of a deal

Jon Corzine, chairman and chief executive officer of MF Global Holdings, speaks during the Sandler O'Neill + Partners global exchange and brokerage conference in New York June 9, 2011.

(Reuters) - MF Global Holdings Ltd's MF.N corporate bonds rallied on Thursday on hopes that the futures broker would be able to sell one of its main units, and stave off anxiety among investors and cuts from ratings agencies.

The company, headed by former Goldman Sachs Group Inc (GS.N) head Jon Corzine, has tapped Evercore to advise it on strategic options, said a source familiar with the situation, and Bloomberg reported that it is looking to sell its futures brokerage subsidiary.

MF Global's shares fell as much as 16 percent Thursday, and have dropped nearly 60 percent this week as Moody's cut the company's debt to a step above junk and the company posted a quarterly loss. The more shares fall, the more difficult it may be for the company to wrangle a good price in any deal, analysts said.

Adding to the pressure, Fitch Ratings downgraded MF Global on Thursday and placed it on Rating Watch Negative, citing an increased risk-taking that has left the company "vulnerable to potential credit deterioration and/or significant margin calls."

MF Global's recent difficulties began after it decided to transform itself into an investment bank that did more than just place trades for clients on futures exchanges. As part of that effort, it bought more than $6 billion of European debt, a position whose value plunged over the summer when the continent's long-simmering sovereign debt crisis flared up.

On Thursday morning, the euro zone leaders struck a deal to contain the debt crisis, helping to ease the concerns about MF Global's European sovereign debt holdings.

MF Global's bonds maturing in 2016 with a 6.25 percent coupon rose to 70 cents on the dollar from 67 cents late Wednesday. On Wednesday, they traded as low as 45 cents on the dollar.

The rally is also attributable to reports that MF Global may sell all or part of itself. The Bloomberg report said MF would not sell the holding company, only its futures broker subsidiary.

Trading volume in MF Global stock was 15 times the norm on Wednesday.

"(W)e believe a potential sale must occur in days, not weeks, in order for management to get maximum value of the customer portfolio of assets to be transferred," Keefe Bruyette & Woods analysts Niamh Alexander wrote in a note.

An MF Global spokeswoman was not immediately available.

PRETTY MUCH FINE

Since taking the reins early last year, former Goldman Sachs executive Corzine has been reshaping MF Global into an investment bank, taking steps such as ramping up trading risk.

On an internal company call on Wednesday, Corzine discredited the analysis of the firm performed by investment banks, according to a person who was on the call.

"He said things are fine, pretty much," the source said.

MF Global continues to be a member in good standing, according to representatives of CME Group Inc (CME.O), IntercontinentalExchange Inc (ICE.N) and options clearinghouse OCC.

To remain a member in good standing, a clearing firm must show it has the financial resources -- whether from external lines of credit, its own capital, or some other means -- to step in and backstop should one of its customers default.

The clearinghouses have been through this drill before.

In 2008 a rogue wheat trader cost MF Global $141 million, sending its shares down more than 90 percent; in 2005 the parent company of Refco LLC, collapsed under allegations of securities fraud, and Refco was eventually auctioned off to the highest bidder -- Man Financial, which later changed its name to MF Global.

Both times, clearinghouses stepped in to check up on the broker's financial condition, and declared it a member in good standing. Both times, there was plenty of behind-the-scenes work -- including clearinghouse auditors' checks on the broker's finances, and frequent calls discussing the status of the firm's largest positions.

MF Global shares were down 12.4 percent at $1.49 on Thursday afternoon, above an earlier low at $1.42.

(Reporting by Jonathan Spicer, Paritosh Bansal, John Balassi, Frank Tang, Timothy Sifert, Jonathan Leff, Dan Wilchins and Jed Horowitz in New York, and Ann Saphir, Gavin Maguire and Meredith Davis in Chicago, editing by Matthew Lewis and Gerald E. McCormick)