TEXT-S&P cuts ConvergEx Group rating to 'B', outlook is stable

Fri Nov 30, 2012 1:10pm EST

Overview
     -- ConvergEx Group's earnings and debt-to-EBITDA leverage in the first 
nine months of 2012 were weaker than we expected because of sluggish market 
activity and slower-than-expected debt reduction.  
     -- Also, the U.S. Department of Justice and the SEC are investigating the 
firm, which heightens our concerns about its enterprise risk management. We 
also believe the escalating legal costs could inhibit the company's financial 
flexibility.
     -- We are lowering our long-term counterparty credit rating on ConvergEx 
to 'B' from 'B+'. In addition, we are lowering our debt rating on the firm's 
first-lien senior secured credit facility to 'B' from 'B+' and our rating on 
its second-lien credit facility to 'CCC+' from 'B-'.
     -- The stable outlook reflects our expectation that ConvergEx will 
gradually reduce debt and maintain interest coverage and leverage metrics that 
are more in line with the 'B' rating category.

Rating Action
On Nov. 30, 2012, Standard & Poor's Ratings Services lowered its long-term 
counterparty credit rating on ConvergEx Group LLC to 'B' from 'B+'. The 
outlook is stable. We also lowered our rating on ConvergeEx's first-lien 
senior secured credit facilities to 'B' from 'B+' and our rating on its 
second-lien secured credit facility to 'CCC+' from 'B-'. The recovery ratings 
on the first-lien and second-lien debt remain '4' and '6', respectively.
Rationale
Standard & Poor's rating action on ConvergEx is based on the company's 
weakened financial profile due to high debt leverage and subpar operating 
performance, including its weak interest coverage, declining overall earnings, 
less-than-adequate cushion against its covenants, the increasing level of 
costs and affected business lines in relation to the ongoing SEC and 
Department of Justice (DoJ) investigations, weak risk management, and negative 
tangible equity. The company's low-risk, institutional trade execution 
business model and well-positioned investment technology business partly 
offset these weaknesses. 

ConvergEx was formed in October 2006 in a highly leveraged transaction. As a 
result, the company has since carried a heavy debt load, with negative 
tangible equity and weak interest coverage. ConvergEx completed a debt 
restructuring at the end of 2010, in which it refinanced $750 million of debt 
into a $610 million first-lien term loan due in 2016 and a $140 million 
second-lien term loan due in 2017. This transaction significantly improved the 
duration of the company's debt maturity profile. As of Sept. 30, 2012, the 
first-lien debt outstanding was $581.5 million, and second-lien debt was $140 
million. ConvergEx has trailing-12-months (as of Sept. 30) adjusted EBITDA of 
$152 million, and we continue to view its debt-to-EBITDA ratio of 4.8x as high 
and its EBITDA-to-cash interest coverage ratio of 3.2x as weak. 

The company's revenue is divided into two primary streams: investment 
technologies and investment services. Revenue growth has slowed in both 
businesses in 2012. Investment technologies revenue was down 3.1% (as of Sept. 
30, 2012) compared with the same period in 2011, and investment services 
revenue was down 38.7%. In our opinion, the investment technologies and 
investment services businesses complement each other and have fairly low risk. 
The company has partially grown through acquisitions, which were financed 
primarily with cash on hand, which resulted in lower-than-expected debt 
reduction associated with its formation in October 2006. 

The SEC and U.S. DoJ have been conducting parallel investigations since August 
2011 regarding certain nonelectronic trade execution practices conducted 
through ConvergEx's Bermuda subsidiary that conducted high-touch execution 
business, ConvergEx Global Markets (CGM). Since the launch of the 
investigation, ConvergEx has closed its trading desks in Bermuda and Hong 
Kong, including the termination of its employees that violated ConvergEx's 
Code of Conduct and has enhanced its policies, procedures, and disclosures. 
But at the same time, ConvergEx has incurred substantial costs in legal fees 
(which may continue to escalate) since the launch of the investigation in 
August 2011, which hurt the company's financial performance in the first nine 
months of 2012. We continue to view ConvergEx's risk management as weak, and 
we will revisit our assessment once the investigation results are complete. 

The on-balance-sheet liquidity is a weakness for the ratings, in our opinion. 
We believe ConvergEx is a non-balance-sheet business that has limited needs 
for liquidity to fund operations beyond simple trade payables. However, the 
nature and timing of ultimate resolution are currently unclear, and we think 
any substantial settlement amount may inhibit the company's current liquidity 
profile. Excess cash decreased to $66 million as of Sept. 30, 2012, from $82 
million a year earlier.

ConvergEx has substantial negative tangible equity (negative $497 million as 
of Sept. 30, 2012). However, since the company doesn't need the balance sheet 
for its business operations, we consider this less of a risk for the company 
than we would for a broker that trades principal positions. 

ConvergEx remains one of the largest independent institutional equity-trading 
brokers in the U.S. The company's two main business lines, investment 
technologies and investment services, appear to complement each other, and 
revenue is split approximately 74% and 26%--the latter including the 
institutional equity and options trading business. We believe that a portion 
of the technology revenue is still directly related to brokerage activity, but 
the segment (especially the software platforms business) has shown resiliency 
in 2012 in the face of declining trading volumes. We continue to view 
ConvergEx's institutional broker model as having inherently lower risk than 
some traditional brokerages because it involves no proprietary trading, and it 
does not require ConvergEx to hold a securities inventory. ConvergEx's growth 
between 2006 and 2011 reflects the company's significant investment in its 
investment technologies group. Management has grown this group both 
organically by expanding offerings abroad and increasing levels of product 
development and through acquisitions. In our view, this segment provides the 
company with diverse revenue streams and a good niche position.

Outlook
The stable outlook reflects our expectation that ConvergEx will gradually 
reduce its debt and will not materially change its credit profile over the 
next 12-18 months. If ConvergEx reduces debt more than we expect, maintains an 
interest coverage ratio of more than 4.0x, and reduces its debt-to-EBITDA 
leverage ratio to less than 4.5x on a sustainable basis, we could raise the 
ratings. Conversely, if the company's liquidity profile weakens substantially, 
or if interest coverage or leverage deteriorates to within 0.5x of covenant 
levels, we could lower the ratings.

Related Criteria And Research
Rating Securities Companies, June 9, 2004

Ratings List

Downgraded
                                        To                 From
ConvergEx Group LLC
 Counterparty Credit Rating             B/Stable/--        B+/Stable/--
 Senior Secured                         B                  B+
  Recovery Rating                       4                  4
 Subordinated                           CCC+               B-
  Recovery Rating                       6                  6

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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