TEXT - S&P cuts GFI Group Inc

Fri Dec 21, 2012 3:54pm EST

Overview
     -- GFI Group Inc.'s lower GAAP profits and weaker debt service coverage 
trends in 2012, in our calculations, are likely to persist into 2013, 
resulting in lower debt coverage ratios. 
     -- As a result, we lowered our issuer credit and senior unsecured ratings 
on GFI to 'BB-' from 'BB+'. The outlook on the issuer credit rating remains 
negative.
     -- The negative outlook reflects our view that GFI will have difficulties 
improving its credit measures in competitive and slow trading conditions. 

Rating Action
On Dec. 21, 2012, Standard & Poor's Ratings Services lowered its issuer credit 
and senior unsecured ratings on GFI Group Inc. to 'BB-' from 'BB+'. The 
outlook on the issuer credit rating is negative.

Rationale
Standard & Poor's ratings on GFI reflect the company's position as a small 
firm in the intensely competitive, low-margin, and relatively narrow 
institutional agency brokerage business. The company relies on 
market-dependent trading volumes to generate revenues.

The rating actions reflect our view that GFI's generally accepted accounting 
principles (GAAP) profits and voice brokerage revenues are under pressure as a 
result of lower industrywide trading volumes. Lower volumes result from 
reduced investor risk appetite and reduced trading at large marketmaking 
investment banks. We expect lower volumes to continue through 2013. In the 
year-to-date ended Sept. 30, 2012, the company's total brokerage revenues were 
down 12% from the same time last year, with fixed income and equity trading 
down 20% and 24%, respectively. However, we do note third-quarter 2011 was a 
good quarter for GFI. While electronic trading and market data revenues were 
up 13%, this segment is only a fraction of GFI's total revenues.

Looking forward, new regulation such as the Volcker Rule could potentially 
increase revenue growth through the expansion of GFI's customer base if 
marketmaking activities are disintermediated from larger brokers to smaller 
agency brokers, including GFI. However, increased revenues won't necessarily 
lead to better credit protection measures unless profits improve. 

GFI's credit measures were weak for the quarter ended Sept. 30, 2012, with 
GAAP EBITDA margins at a modest 4.0%, interest coverage at 1.3x, and debt to 
GAAP EBITDA at 7.1x (not adjusted for noncash compensation expenses). While 
the rolling-four-quarters' ratios were better at 4.8%, 1.6x, and 5.5x, 
respectively, these ratios were negatively impacted by a $19.7 million 
restructuring charge in the fourth quarter of 2011. We view this charge as 
recurring and not as a one-time item as we believe that the company could 
incur further charges in coming years as it continues to restructure in 
rapidly changing business and regulatory conditions. In addition, we don't 
make adjustments to GAAP EBITDA for noncash compensation expenses, consistent 
with our belief that stock buybacks have matched noncash compensation expense 
over time. Should the historical level of stock buybacks reduce materially 
over time, we may take some non-GAAP adjustment into consideration which may 
improve metrics. 

We believe GFI's low margins primarily reflect its high compensation expenses 
in conjunction with weaker revenues. Compensation and benefits expenses 
represented 59.5% of the company's revenues in the third quarter of 2012, up 
from 58% the same time last year, despite a reduction of $30 million in 
compensation expenses during that time. The firm is engaged in cost-cutting 
programs, and our expectation is that the company should be able to improve 
margins by reducing costs faster than revenues decline. The company's cash 
position supports the current rating, and our expectation is that cash levels 
will at least be maintained at current levels. As of Sept. 30, 2012, the 
company held $210 million in cash and equivalents, yet we believe only about 
50% of this amount is available for corporate purposes once regulatory and 
clearing requirements are excluded. Of the remaining cash available for 
corporate purposes, only a portion is in the U.S., yet we believe repatriation 
is not a concern. On the positive side, GFI has no debt maturities until 2018, 
and nothing is drawn on the bank facility. The company is cash flow positive 
on an operating basis so far in 2012, but sign-on bonuses, stock buybacks, and 
dividends have resulted in lower cash levels from year-end 2011. The company's 
aggressive repurchase of Treasury stock and dividends totaled $165 million 
since 2010, compared with a cash decrease of $133 million, in our calculation. 
Our expectation is that the company's cash levels will remain stable going 
forward. 

Outlook
The negative outlook reflects our view that GFI will have difficulties 
improving its credit measures in competitive and volatile trading conditions. 
We could lower the ratings if we believe GFI's credit measures won't improve 
over the next 12 months or if liquidity is materially reduced. We expect the 
firm's GAAP EBITDA to interest to improve to 4.0x, its debt to GAAP EBITDA to 
decrease to about 3.0x, and cash to be conserved at current levels. We could 
revise the outlook to stable if GFI meets or exceeds our credit measure 
expectations and business conditions stabilize over time.

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

Ratings List
Downgraded
                                  To                 From
GFI Group Inc.
 Issuer Credit Rating             BB-/Negative/--    BB+/Negative/--
 Senior Unsecured                 BB-                BB+