Jan 8 - Fitch Ratings has affirmed Cantor Fitzgerald, L.P.'s (Cantor) and
BGC Partners Inc.'s long- and short-term IDRs at 'BBB/F2'. The Rating Outlook is
revised to Negative from Stable.
The affirmation reflects Cantor's established position in the institutional
middle-market brokerage space, moderate risk profile due to its
distribution-based business model, controlled leverage, and good funding and
Ratings are further supported by Cantor's economic interest in BGC Partners Inc.
(BGC), which helps to diversify its revenue base.
The revision in Outlook to Negative reflects persisting headwinds facing the
industry, including low trading activity due to regulatory uncertainties,
eurozone debt concerns, sluggish U.S. recovery, and slowdown in Asia. The
Negative Outlook also reflects the challenging operating performance at Cantor's
inter-dealer broker subsidiary BGC, which has experienced significant decline in
financial brokerage-related revenues. Finally, the Negative Outlook reflects
concerns with Cantor's commercial real estate securitization activities, which
although separately capitalized and non-recourse, could increase balance sheet
risk during warehousing and contingent liquidity risk thereafter. Fitch also
notes that Cantor faces potential emerging liquidity/refinancing risk associated
with $300 million of debt coming due in June 2015.
BGC's ratings are linked to Cantor's ratings, as Fitch considers BGC as a 'core'
subsidiary of Cantor because of the significant interrelationship between the
Cantor reported relatively higher revenues, pre-tax margins and earnings for the
nine months ending Sept. 30, 2012 (9M'12) compared to 9M'11, driven by strong
rebound in institutional debt business and the Cantor Commercial Real Estate
(CCRE) segment, which experienced strong earnings from increased securitizations
at tighter spreads. However, this improvement was partly offset by continuing
decline in revenues and margins in the institutional equity business at Cantor
and financial brokerage revenues at BGC for 9M'12.
At BGC, financial services brokerage revenues, which exclude real estate
brokerage, fell 20.6% and 11.9% for 3Q'12 and 9M'12, respectively, as all
financial services asset classes experienced double-digit revenue decline.
Financial brokerage revenues are being pressured by industry-wide trading volume
decline across global financial markets and low volatility experienced in most
asset classes. The decline in financial services brokerage revenues was offset,
to some extent, by increased revenues from real estate brokerage. Still, pre-tax
margins fell as compensation costs associated with real estate brokerage
expansion remained high.
Fitch believes that Cantor's institutional business and BGC's financial
brokerage business will remain challenged in the medium term because of lower
trading volume due to regulatory uncertainties and eurozone debt concerns, lower
bid-ask spreads, and the low interest rate environment. Fitch will continue to
monitor both businesses closely over the next few quarters. A material drop in
revenues combined with margin compression at these segments, without a
considerable increase in margins from other segments, could pressure Cantor and
An important ratings consideration is whether Cantor is taking additional risk
in its business, either via secured lending (repo) or by adding leverage, to
increase profit margins. Fitch notes that Cantor's repo book continues to be
backed by high-quality liquid assets. Additionally, Cantor has managed its
balance sheet more conservatively. Leverage, both on a gross and net basis, has
declined post-crisis. Fitch expects Cantor's leverage ratios to stay low given
the uncertain economic outlook. Managing the balance sheet conservatively and
within the articulated leverage levels is the key driver of Cantor's ratings.
Liquidity is managed and stressed for potential outflows in an effort to account
for highly volatile situations, using a maximum cumulative outflow (MCO) model.
The goal is to maintain liquidity, at all times, in excess of the target
reserve. In addition, a committed bank credit facility is in place to address
any funding gaps that may arise from stressed situations.
Cantor is holding an increased proportion of liquidity at its primary regulated
broker-dealer subsidiaries in the U.S. and the U.K., in light of current
volatile capital markets conditions and increased regulatory requirements. As a
result, liquidity level at the parent level has relatively declined. Cantor does
not have any senior unsecured debt maturing until 2015, which reduces near-term
refinancing risk, although Fitch will monitor Cantor's repayment/refinancing
plans with respect to outstanding debt, particularly as it relates to available
cash and earnings generation as well as balance sheet and contingent liquidity
risks associated with Cantor's commercial real estate securitization activities.
At BGC, leverage, measured as gross debt to trailing 12 months (TTM) adjusted
EBITDA, increased to 2.0x at Sept. 30, 2012, compared to 1.5x at year-end 2011.
The increase was mainly driven by additional borrowings to finance real estate
brokerage acquisitions and decline in EBITDA levels. Interest coverage, measured
by adjusted EBITDA to interest expense, declined to 7.0x for TTM Sept. 30, 2012
from 9.6x at year-end 2011. Fitch expects leverage and interest coverage ratios
to improve from current levels with the full integration of the real estate
brokerage acquisitions. However, absent corresponding debt reductions, further
declines in EBITDA levels could result in negative rating action.
Cantor has embarked on an expansion plan that entails geographical expansion of
select trading products. The plan also entails development of investment
banking, commercial real estate (origination, underwriting, and securitization),
and prime brokerage businesses. Fitch will follow Cantor as its expansion
efforts evolve, and will pay close attention to revenue diversity, earnings
generation, risk management and resource allocation (capital, personnel, and
systems). Any significant risk taking in any of these businesses could have
adverse rating implications.
A number of non-core businesses are also part of the Cantor group (e.g. Cantor
Gaming, Cantor Insurance, Cantor Index, Delivery.com) that bear little strategic
relevance to the core business. Currently, several of these non-core businesses
contribute marginally (if at all) to consolidated performance, with measured
deployment of capital to date. Consequently, these ancillary businesses are not
material ratings drivers at this juncture, although it is important to consider
the extent to which these activities consume a portion of management's time and
attention. Over time, however, one or more of these ancillary businesses could
increase financial, operational or reputational risk to a magnitude that would
result in negative rating actions. Furthermore, Fitch would expect non-core
businesses to generate positive cash flow or be exited over the intermediate
term, so as not to create a long-term drag on the financial and human capital
RATING DRIVERS AND SENSITIVITIES
The following factors may have a negative impact on ratings:
--If gross and net leverage ratios at Cantor trend materially higher than
--Evidence of increased risk appetite in the repo or securities inventory book;
--Significant growth, consistent operating losses leading to depletion of
capital, and/or risk management or reputation issues at the non-core ancillary
--Further deterioration in leverage and interest coverage ratios from current
levels at BGC;
--Change in regulation that materially impacts BGC's business model.
Conversely, sustained profitability in core business segments supported by
moderate risk appetite, low leverage, effective operational risk management, and
sufficient capital and liquidity levels could lead to a Stable Rating Outlook.
Formed in 1945, Cantor Fitzgerald L.P. (Cantor) is one of the few remaining
private partnerships on Wall Street. Cantor operates its business predominantly
on a distribution-based brokerage model. Cantor maintains focus on
'middle-market' clients, and offers them a marketplace for various financial
instruments. Headquartered in New York City, Cantor has over 8,000 employees
located in more than 60 offices and 20 countries. Cantor is owned by CF Group
Management, Inc., the managing general partner, and several hundred limited
Fitch has affirmed the following ratings:
Cantor Fitzgerald, L.P.
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2'
--Senior unsecured debt 'BBB'.
BGC Partners Inc.
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2'
--Senior unsecured debt at 'BBB'.
The Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com' . The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (August 2012);
--'Securities Firms Criteria' (August 2012);
--'Rating FI Subsidiaries and Holding Companies' (August 2012).
Applicable Criteria and Related Research:
Rating FI Subsidiaries and Holding Companies
Securities Firms Criteria
Global Financial Institutions Rating Criteria