October 28, 2011 / 3:06 PM / in 6 years

IFR-MF Global bonds tumble following downgrade

NEW YORK, Oct 28 (IFR) - MF Global MF.N bonds continue their freefall Friday, dropping to the mid-40s after touching a morning low of 38 on two agencies dropping the firm’s ratings below investment grade Thursday.

The 5-year US$325m 6.25% notes MF offered at par in August fell more than 50% over a two day period to trade at 44.5 at the lowest level Wednesday after the firm released earnings. The bond traded at 89.25 on Monday, the day before the results.

The firm’s shares traded below US$1 a share Friday.

MF Global reported US$6.3bn of long credit exposure to shorter-term European sovereign debt, including US$3.2bn of exposure to Italy alone. The exposure spooked the market and regulators which have asked it to boost its capital.

Fitch Ratings cut the firm’s credit rating to junk, BB+, early Thursday and was followed by Moody’s Investors Service late Thursday evening, which cut the rating two notches to Ba3. The loss of its investment grade rating will hasten the exodus of customers away from the firm.

In the current environment, the knee-jerk reaction is to get away from any failing entity as fast as possible, said Dick Bove, vice president of Rochdale Securities. Bove reported that he has received calls from people asking if they should pull their money out of MF Global. “I haven’t had calls like that since Lehman Brothers,” he said.

The broker/dealer attempted to reassure the markets that its customers had not abandoned it, but the firm cannot survive the loss of its investment grade rating and will likely to to have a deal in place over the weekend said a restructuring investment banker.

MF Global’s bonds collapsed Wednesday following a disastrous fiscal second quarter earnings report and news the firm tapped Evercore Partners to explore strategic alternatives. The market took the news as an admission that the firm was on the auction block. The names of potential buyers included an opportunistic acquisition by Goldman Sachs, Citigroup was also mentioned as a potential acquirer, as was TD Bank, or another well capitalized Canadian bank looking to expand its presence in the US.

In addition to Evercore, investment bankers identified JP Morgan as the second adviser. Neither JP Morgan or Evercore returned calls seeking comment.

John Balassi and Philip Scipio are reporters for IFR

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