Fitch Ratings has downgraded the ratings of futures broker MF Global Holdings Ltd., to below investment grade by Fitch Ratings, and placed it on rating watch negative, over concerns about its profitability.
In making the move to cut MF Global’s ratings, Fitch said its rating actions “reflect MF’s continued challenges in establishing a sustainable level of profitability and improving its leverage profile.”
It notes that the low interest rate environment, which is expected to last over the medium term, and reduced commissions, are hindering profitability in the firm’s traditional clearing activities. “Further, volatile capital markets present MF with significant headwinds in executing its strategic transformation from a pure broker to a broker-dealer and, longer term, to a full investment bank without outsized incremental risk,” it adds.
Additionally, it notes that the firm’s increase in principal trading, and, to a lesser extent, proprietary trading, has elevated its risk profile. “These increased risk taking activities have resulted in sizeable concentrated positions relative to the firm’s capital base, leaving MF vulnerable to potential credit deterioration and/or significant margin calls,” it says.
“While Fitch notes that the firm has made some progress in rationalizing its capital structure, the firm’s persistently weak earnings and leverage are no longer consistent with an investment grade financial institution,” it concludes.
Fitch says it expects to resolve the rating watch negative as the firm concludes the evaluation of various strategic options, including efforts to build scale in its futures commission merchant and/or the disposition of assets, which could impact capitalization as well as the company’s earnings profile.