-- 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
-- The negative outlook reflects our view that GFI will have difficulties
improving its credit measures in competitive and slow trading conditions.
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.
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
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
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
GFI Group Inc.
Issuer Credit Rating BB-/Negative/-- BB+/Negative/--
Senior Unsecured BB- BB+