Just days before it declared bankruptcy on October 31, MF Global concluded it could remain solvent even if lost access to funding after having its debt downgraded to "sub-investment grade," according to a stress-test scenario obtained by Reuters.
The company document outlined an emergency funding plan that was to go into effect if the market and banks reacted poorly to its second-quarter loss, reported on October 25.
"Based on the analysis, we believe there is sufficient liquidity to manage through one month under a severe stress event," the document concluded. It said that management would have "a relatively short amount of time" to revise its strategy and that weak credit ratings might require a "reshaping of current business model and strategic direction."
The plan touched on emergency methods for drawing down bank loans and for exiting complex repo-to-maturity loans engineered by then-Chief Executive Jon Corzine. MF Global anticipated that within 30 days of a downgrade from two or more credit agencies, it would begin rebuilding its franchise and possibly sell strategic assets. It believed it would have excess cash freed up from a contraction of its balance sheet.
The plan also spelled out workflows for various parts of the company. The finance department was to keep "all hands on deck from an accounting and analysis perspective," the document said, to ensure that customer fund segregation calculations were done with "completeness and accuracy" on a daily basis.
MF Global not only lost access to funding in the days following its credit downgrades at the end of October but is also still trying to locate hundreds of millions of dollars of customer funds.
(Reporting By Jed Horowitz in New York and Christopher Doering in Washington; Editing by Steve Orlofsky)