BGC Partners' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: BGC Partners, (BGCP)

BGC Partners, Inc. (NASDAQ:BGCP)

Q2 2013 Earnings Conference Call

August 1, 2013 10:00 PM ET

Executives

Jason McGruder - Head of Investor Relations

Howard Lutnick - Chairman and Chief Executive Officer

Shaun Lynn - President

Sean Windeatt - Chief Operating Officer

Graham Sadler - Chief Financial Officer

Analysts

Richard Repetto - Sandler O’Neill & Partners

Patrick O'Shaughnessy - Raymond James

Niamh Alexander - KBW

Michael Wong - Morningstar

Operator

Good day, ladies and gentlemen, and welcome to the Q2, 2013 BGC Partners Incorporated Earnings Conference Call. My name is Sepra and I will be your operator for today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. And I would now like to turn the call over to Mr. Jason McGruder, Head of Investor Relations. Please proceed, sir.

Jason McGruder

Good morning. Our second quarter 2013 financial results press release was issued this morning. This can be found in either the News Center or Investor Relations section of our website at bgcpartners.com. During this call, we will also be referring to a presentation that summarizes our results, which includes other useful information. This too can be found in the Investor Relations section of our site.

Throughout today's call, we will be referring to results only on a distributable earnings basis. Please see today's press release for GAAP results. Please also see the section of today's press release entitled distributable earnings, distributable earnings results compared with GAAP results, reconciliation of revenues under GAAP and distributable earnings and reconciliation of GAAP income to distributable earnings, for definition of these terms and how, when and why management uses them.

Unless otherwise stated, that we refer to the income statement items such as revenues, expenses, pre-tax earnings or post-tax earnings, we are doing so only on a distributable earnings basis. Unless otherwise stated, all the financial comparisons we will be making on today's call will contrast second quarter 2013 to the second quarter of 2012.

I also remind you that the information on this call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include statements about the outlook and prospects for BGC and for its industry as well as statements about our future financial operating performance. Such statements are based upon current expectations that involve risks and uncertainties. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied because of a number of risks and uncertainties that include, but are not limited to the risks and uncertainties identified in BGC's filings with the U.S. Securities and Exchange Commission. We believe that all forward-looking statements are based upon reasonable assumptions when made.

However, we caution that it is impossible to predict actual results or outcomes or effects of risk uncertainties or other factors or anticipated results or outcomes and accordingly you should not place undue reliance on these statements. Forward-looking statements speak only as of the date when made and we undertake no obligation to update these statements in light of subsequent events or developments. Please refer to the complete disclaimer with respect to forward-looking statements and risk factors set forth in our most recent public filings in Form 8-K, 10-K and 10-Q, which we incorporate today by reference.

Now, I'd like to turn the call over to your host, Howard Lutnick, Chairman and CEO of BGC Partners.

Howard Lutnick

Thank you, Jason. Good morning and thank you for joining us for our second quarter 2013 conference call. With me today are BGC's President, Shaun Lynn; our Chief Operating Officer, Sean Windeatt; and our Chief Financial Officer, Graham Sadler.

Before we discuss our second quarter results, I would like to describe a new program we've put in place to redeem partners units by providing them with fewer restricted shares of common stock which reduces our share count, it pays withholding and other taxes and reduces the value of their loans to us. Taken as a whole, this plan created effectively a 32.2 million share buyback on tremendously cash and tax efficient terms to the company. In addition to reducing the company's fully diluted share count, we also plan to reduce the rate of equity issuance to partners and employees going forward. This program provides us the opportunity to extend and modify our partners' contracts while providing partners with a defined multiyear schedule to monetize their economic interest in BGC. We believe this program serves as a powerful incentive to attract and retain key partners and employees.

At the end of the quarter, we redeemed 77.4 million units from the partners of BGC. The company expects to issue 45.2 million common Class A BGC shares of which 39.1 million are restricted shares. So taken together, the company's fully diluted share count decreased by 32.2 million shares. BGC plans to pay approximately $106 million in distributions and taxes owed on behalf of its partners. Redemptions also resulted in a $95 million post tax reduction in the value of employee loans on the company's balance sheet. These two items add up to $201 million, so taken together; the net reduction in BGC's fully diluted share count of 32.2 million got the company the effective equivalent of $201 million or $6.24 per unit. These new restricted shares are expected to be saleable by partners in good standing after either five or ten years depending on their current contract. Partners who agreed to extend the length of their employment agreements and or other contractual modifications sought by the company are expected to be able to sell the restricted shares over a shorter time period.

We believe that the expected contract modification will also materially reduce the rate of employee partner share issuance going forward even as we maintain the ability to retain and incentivize our key employees and partners through restricted shares and partnership units.

We received $750 million in cash upon the closing of our recent NASDAQ OMX transaction after taking into account the future expected cash payments required to pay distributions and corporate taxes related to this transaction and the distribution and withholding taxes related to the reduction of fully diluted share count, we expect to have approximately $459 million remaining from the eSpeed proceeds in addition to our already strong cash position.

We intend to use these proceeds to repay debt, make accretive acquisitions, invest in organic growth in both of our segments and repurchase additional units and/or common shares. We also expect to maintain our regular common dividend for the foreseeable future. I am happy to report that our Board declared a $0.12 dividend for the quarter. We are confident in the sustainability of our current dividend, and in yesterday's closing stock price, the dividend yield on BGC is approximately 7.6%.

With that I would like to turn the call over to Shaun.

Shaun Lynn

Thanks, Howard and good morning everyone. In our Financial Services segment, volatility in rates and foreign exchange picked up towards the end of the second quarter. And we were at or above historical averages. This resulted in stronger industry volumes in these asset classes. In equities and credits however volatility remains below historical averages which kept volumes down. While market conditions were mixed revenues for our Financial Services segment increased by 2.3% in the quarter. This performance was better than the top line growth reported so far by our inter-dealer broker competitors and we believe we continue to gain market share.

And Financial Services segment generated revenues of $316.3 million and $56.4 million on pre-tax earnings. A year earlier this segment generated $309.2 million in revenues and $58.5 million in pre-tax profits.

Looking at results by asset class, our revenues from electronics [rate] [ph] product excluding eSpeed increased by approximately 24% in the quarter driven mainly by strong growth from certain desks in interest rate derivatives. Revenue from our voice/hybrid rate desks also grew while eSpeed rates revenues were generally flat. BGC's overall rate revenues increased by 2.9%.

And Fully Electronic credit revenues grew by approximately 8% in the quarter but our overall credit revenues declined by 3.9%. Although some of that cash credit desks showed strong growth the overall credit derivatives market continues to remain challenged. Our Foreign Exchange revenues increased by 14% driven by both double digit growth from our voice/hybrid FX desks and by approximately 27% increase in revenues from our spot FX business. This growth exceeded the comparable volume figures reported by CLS, CME, EBS and Reuters.

Global equity markets also continue to be generally difficult according to most exchanges and central clearing organizations. For example equity related volumes were down between 4% and 42% according to the Deutsche Borse, Euronext, and DTCC. In comparison BGC's revenues from equities and other asset classes decreased by 2.5%.

Excluding eSpeed financial services electronic trading market data and software technology revenues increased by 12.2% to $21.9 million or 6.9% of segment revenues in the quarter compared with $19.6 million or 6.3%. What excites us is the growth of our remaining fully electronic businesses. It’s now about the same size as the eSpeed business we sold and it’s clearly growing at a faster pace.

The growth of our retained technology products has continued to exceed most comparable industry volumes. They generate a pre-tax margin of around 45%, and we believe that these businesses will continue to grow faster than our overall financial services segment.

We ended June with 1,587 brokers and sales people in financial services, down from 1,757 a year earlier due to our having a selectively reduced front office headcount earlier in the year. Our average revenue per broker sales person in the segment improved by 13.3% to approximately $201,000 in the second quarter compared with a $177,000.

Turning our Real Estate Services segment, industry metrics continue to move in a positive direction in the second quarter. With respect to leasing vacancy rates, asking rates and net absorption rates improved year-on-year. Our NGKF research team believes that these positive US leasing trends will continue as the year progresses.

According to Real Capital Analytics overall US commercial property sales volume grew by 13% year-over-year in the second quarter. Our CoStar said that commercial property proceeds were up by 9.4% as of the most recent data. Commercial real estate continues to be a relatively attractive investment given the low interest rate environment. And so NGKF’s research team expects that these positive trends will continue for an extended period of time.

With respect to NGKF’s results management services and other revenues increased by 3.6%. On April 13, 2012 BGC purchased certain assets of Grubb & Ellis. As part of the transaction NGKF collected $21.7 million during 2012 not related to an ongoing real estate services business of which $12 million were recognized in the second quarter of 2012. These revenues are primarily associated with the collection of receivables related to deals initiated by Grubb & Ellis brokers who left prior to the acquisition. As a result, real Estate Services revenues and pre-tax attributable earnings for the second quarter 2012 were higher than they would otherwise have been.

Excluding these non corporate assets NGKF' brokerage revenues improved by 9.7% while overall revenues improved by 7.9%. In order to help you better understand year-over-year comparison we approached non core NGKF revenue figures for you in our earnings presentation. Going back to the second quarter of last year, as a reminder commercial real estate services firms tends to generate the least revenues and profits in that first calendar quarter. And the largest top and bottom line in the fourth quarter. Given these seasonality positive industry trends and the superior execution of our strategy by the executives and brokers of NGKF, we expect our real estate results to above current levels for the rest of the year.

NGKF had 898 brokers and sales people at quarter end, up 5.2% compared with the early figure of 854. Average revenue for real estate broker was approximately $115,000 in the second quarter, compared with the $114,000 and excluding the non core purchase assets. Please see overall front office headcount decreased by 4.8% to 2,485 brokers in sales people as of June 30th. We see total average revenue per (inaudible) employee was up 5.2% to approximately $117,000, a year earlier these figures were 1,780 brokers and sales people at an average of approximately $162,000 each.

With regards to regulation, we expect to be oppose to operate Swap Execution Facility or SEF under Dodd-Frank Act later this year. Although rule in Europe and Asia have yet to be finalized, we also expect operate successfully under the various non US regulations concerning the OTC market. With that, I will now like turn the call over to Graham.

Graham Sadler

Thank you, Shaun, and good morning everyone. BGC generated revenues of $471.1 million, up 1.3% compared with $465.1 million. Our revenues from the Americas were approximately flat at $245 million; revenues from Europe, Middle East and Africa were up by approximately 5% to $176 million, and Asia Pacific revenues decreased by approximately 5% to $50 million. Excluding the real estate services segment, our global April 2013 revenues were up by approximately 8% to $108 million, May was down by approximately 4% to $113 million, and June results by approximately 2% to $106 million. All when compared with the year earlier?

Turning to expenses, compensation and employee benefits were 61.7% of revenues compared with 59.5% of revenues. Our compensation ratio increased mainly due to the mix of revenues by geography and product.

Non-compensation expenses were down on an absolutely basis and as a percentage of revenues to 27.5% compared with 28.4%.The decrease in non-compensation expenses is due mainly to lower professional and consulting fees, and occupancy and equipment costs partially offset by expenses related to the higher interest expenses as a result of the June 2012 issuance of senior retail notes.

We are on target to reduce overall costs by a total of at least $50 million on a go-forward basis by the end of 2013 as compared with the second half of 2012 run rate. This reduction will include comp and non-comp expenses.

Our pre-tax earnings were $53.8 million compared with $55.9 million. Our pre-tax margin was 11.4% compared with 12%. BCG's effective tax rate for distributable earnings was unchanged to 14.5%. Our post tax distributable earnings were $44.9 million or $0.13 per fully diluted share compared with $46.5 million or $0.17. Our post tax earnings margins was 9.5% compared to a 10%. Our fully diluted weighted average share account was $378.1 million for the second quarter 2013 for both GAAP and distributable earnings. This included 39.8 million shares associated with our convertible senior notes. A year earlier our fully diluted weighted average share count was 313.8 million, while our GAAP fully diluted weighted average share account was lower because certain share equivalents were diluted for distributable earnings but not for GAAP. As of June 30, 2013, our fully diluted share account was 349.7 million; this is due in conversion of the 39.8 million shares underlined in the convertible senior notes. Absent acquisitions or significant higher rate we expect our fully diluted share account growth to be significantly less than in recent quarters.

During the quarter, there were a number of items that impacted our GAAP results both positively and negatively. But that were not part of our ordinary operating business. A number of GAAP charges were excluded from our calculation of pre-tax distributable earnings and totaled $464.6 million. These non cash, non diluted GAAP compensation charges related to the 32.2 million share count reduction and consisted of the following items. The redemption of the 77.4 million partnership units, the expected issuance of 45.2 million Class A common shares of which 39.1 million are restricted, and our reserve related to employee loans which represent the grossed up amount related to the $95 million reduction of loans, applicable loans and other receivables from employees and partners.

Our calculation to distributable earnings also exclude GAAP items which totaled a positive $681.1 million. These items consisted of the following: $723 million gain related to the eSpeed sales, other charges with respect to disposition acquisitions and/or resolution of litigation and a non cash reserve related to our commitment to make future charitable contributions related to the company’s annual 9/11 charity day.

We believe that excluding these items best reflects with our on going business will look like going forward. We expect to include the payments associated with BGC receipt of NASDAQ OMX stocks in our calculation and distributable earnings. To make comparisons more meaningful, one quarter of the annual contingent earn out amount will be included each quarter as other revenues.

This amount will be calculated each quarter based on approximately 248,000 shares of NASDAQ OMX stock multiplied by the share price of the last day of the quarter. We are exploring hedging these shares and a dollar amount we include in distributable earnings will be net of any adjustments relating to hedging. As of June 30, 2013, our cash position which we defined as cash and cash equivalents plus unencumbered securities held for liquidity purposes was approximately $1.1 billion. Notes payable and collection wise borrowings and notes payable related parties were $423.8 million. Book value per common shares were $2.76 and total capital which we define as redeemable partnership interest non controlling interest subsidiaries and total stockholder’s equity was $838 million.

In comparison as of December 31, 2012 our cash position was $420.4 million, notes payable and collection wise borrowings and notes payable to related parties were $451.4 million, book value per common share were $2.11 and total capital was $506.3 million. As you can see we've reduced our debt by approximately $28 million so far this year. We expect to pay approximately $185 million in taxes and distribution for the eSpeed sale. The bulk of which will be paid in the middle of September. In addition, we set to pay $106 million in distribution and withholding taxes on the behalf of partners. The bulk of which will also be paid around the middle of September.

With that I am happy to the turn the call back over to Howard.

Howard Lutnick

Thanks, Graham. And did note that we had statistics that is in the loss of BGC's total average revenue for front office employee was up 5.2% to approximately $170,000, year earlier this figures were 2,611 brokers and sales people, they were each and average of about $162,000, so just to make sure that statistic was clear. So thank you Graham, excluding real estate services and eSpeed, our preliminary revenues for the first 21 trading days of July was down by 7.9% compared with the year earlier.

Our full Electronic Business continues to outperform our overall financial services results. Our third quarter outlook reflects both the trends we are seeing in our financial service business and the growth we expect from NGKF. So we expect to generate distributable earnings revenues of between $410 million to $440 million is compared with $446 million. We expect pre-tax distributable earnings to be between approximately $36 million and $46 million as compared to $46.7 million of last year.

If we reached a high end of range we will have made up firstly the entire earnings on the eSpeed business that we sold, while still having over $450 million of additional dry (inaudible) to grow and expand our business. We anticipate an effective tax rate for distributable earnings of approximately 15% to the average of 14.5% and we intend to update our third quarter outlook around the end of September.

We are silent about the growth of our technology base business, the strength in Newmark Grubb Knight Frank and we are focused on cost reduction. Together this will drive the earnings of our company going forward. So, operator, we now like to open the call for questions please

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And your first question comes from the line of Rich Repetto; please go ahead, you are now live into call.

Richard Repetto - Sandler O’Neill & Partners

Yeah, good morning. So I guess Howard the first question the question is going to be on eSpeed and if you looked at sort of the both the full electronic revenue it was down slightly year-over-year and up from the first quarter but down slightly – this is just the full electronic and then if you look at the overall eSpeed revenue it was down slightly sequentially as well as year-over-year. So the question is given the environment when you expect eSpeed to have performed as one of its best quarter this past quarter or not; are we are looking at the wrong indicators?

Howard Lutnick

No, what happened is quantitative easing has suppressed the business fundamentals of the treasury business, it's holding it down, now if you imagine the federal government continues to issue government bond and the Federal Reserve is buying it, right, so instead of them going out in the world and trading and being hedged and all of the natural velocity we get from that, it’s just being suppressed by quantitative easing, and Fed volumes were down a couple of percent and that's simply because of quantitative easing, it's an oddity, the discussion of tapering would be a good thing for NASDAQ and all these kind of discussion, the ending of quantitative easing will be excellent for the US treasury business. Our view was because of quantitative easing it was constrained but as quantitative easing ends and it will end some day, this will result in an excellent acquisition for NASDAQ, it's just being suppressed now by quantitative easing, and then some day when the Federal Reserve starts to liquidate their $3.3 trillion deficit they are holding a bond, that they are holding on their books this will become one of the great issuers of all time so you now have the US treasury as an issuer, and some day you’ll have the Federal Reserve as an issuer and that would be really great for the business. So the basics of the treasury business are, it is a great business, it is being suppressed today but it has enormous potential and opportunity tomorrow, and that’s just the economics of quantitative easing, they are odd, there is nothing other way to say it, it's just odd.

Richard Repetto - Sandler O’Neill & Partners

Okay, that's helpful, Howard. And then I guess Graham, did the tax rate on the cash proceeds change? I thought it was 20% before, is it now being calculated at 25%?

Graham Sadler

Yeah, I mean it just changed a little [inaudible] as you enter all the detail, it's the same number but I don't see as we went through it, it came out at 25%, [inaudible] other than faulty though.

Richard Repetto - Sandler O’Neill & Partners

Okay, and then Howard, well I guess two last quick things. You talked about a SEF [Swap Execution Facility] later in the year, I don't – I am not sure whether you put your application in already or not but you know you can see some of the others getting temporary approval like Bloomberg so just trying to see exactly where your stand and I guess on the real estate just the progression, is each quarter normally better or I know you said first is the worst, fourth is the best, you know I am just trying to get a feel of what's embedded in 2Q for the real estate.

Howard Lutnick

First question is, we have not yet applied but we are working and we expect to operate successfully as a SEF and that's just going apace and with respect – what was your second question again, why don’t you repeat it for me?

Richard Repetto - Sandler O’Neill & Partners

On just real estate, does it normally build throughout the year or I don't know whether it’s that predictable? The real estate you said 1Q was the worst, 4Q is normally the best. I am just trying to see how –

Howard Lutnick

3Q, yes, so it normally builds throughout the year, so 1Q, 2Q, 3Q and then the fourth quarter more than makes up for whatever you thought was missing in the first quarter, so the fourth quarter tends to be you know much, much better which is seasonally attractive for us because obviously the third and fourth quarters in the financial service business tend to be weaker just because of the vacation schedules of the summer, and then Thanksgiving and Christmas. So this should help sort of balance that out, but yes it should grow, so you saw taking out the some of the benefits we've received in the structure of the way we bought Grubb & Ellis made us look better than the ordinary business would have been presented in the second quarter of last year; we've had nice growth over that obviously significantly higher than the first quarter. We expect the third quarter to be higher again and we expect the fourth quarter to be again higher. So, we expect it to grow throughout the year and I think you will be very impressed with the numbers put up by NGKF, it is a first class company, we really think very, very highly of the management and the way the company is growing, it really, really feels excellent.

Richard Repetto - Sandler O’Neill & Partners

Got it, thank you, that color is very helpful, thanks.

Operator

Thank you. And your next question comes from the line of Patrick O'Shaughnessy. Please proceed

Patrick O'Shaughnessy - Raymond James

Hey, good morning guys.

Howard Lutnick

Good morning.

Patrick O'Shaughnessy - Raymond James

So several questions for you. The first is as you look at the M&A landscape, certainly you still have a lot of dry powder for M&A, what sort of opportunities are on your radar right now and what sort of time line do you think we are looking at to see some of those actually executed.

Howard Lutnick

Well, however popular we felt that we were before having over a billion in cash makes you much more attractive [match] [ph]. I think there are numerous opportunities that are worthy of consideration for the company. And that is in both the real estate business as well as in our financial services business. I think we will be able to invest our money very accretively and it rates well in excess of whatever equity yields people would expect will be the cost of our equity at the company. So I think we really should be able to find investments and really give us excellent accretive terms. And you know, we want businesses that fits nicely with us, we are not really looking for strategic investments more like businesses that naturally fit with us that we can leverage our scale and scope. And I think there are opportunities both large scale and small scale but they have to be on the right terms, we are very, very focused on the right price and on the right terms, we will take our time, we will do it right, on the right time and on the right terms and the regulatory landscape will create opportunities for us. It just will, and having the powder will make some transaction occur they might not otherwise have occurred. We are in no rush but we expect to invest it wisely and very accretively.

Patrick O'Shaughnessy - Raymond James

All right, understood. Next question, if I heard Graham correctly I think he said that your quarter end share count was about 350 million shares. Is that includes the 32.2 million that were essentially redeemed in that, I am getting to about 20 million shares were issued during second quarter to get from your end of first quarter share count I think of 360 million, so take 360 plus 20 minus 30 gets you back to just 350, can you talk about why share issuance was so strong again in the second quarter and then you talked about how is it going to drop markedly going forward, how markedly like half a million per quarter, 10 million kind of you could give us a range.

Graham Sadler

Yeah, I think we're looking at around the 5 million a quarter or plus or minus but around that sort of level.

Patrick O'Shaughnessy - Raymond James

Okay, that's helpful.

Graham Sadler

[Inaudible] significantly lower than what it has been over the recent quarters along with [inaudible] after the program that have been outlined.

Patrick O'Shaughnessy - Raymond James

Okay and then just elevated issuance again during the second quarter, is that just kind of function of bringing more people on board in the real estate unit.

Graham Sadler

Yes, to a degree yeah

Patrick O'Shaughnessy - Raymond James

Okay, understood. Just want to touch on expenses little bit so the $681 million add back to your non-GAAP earnings I think wasn't that basically, there was about $50 million component for other charges and non cash reserve related to future charity contributions, if I heard correctly don't you know want to take your charity contribution hit during the third quarter rather than the second quarter

Graham Sadler

Yeah, I mean that is true. Historically that's been the case and we've always added that back for these purposes. But we made commitment for charitable, future charitable contributions in Q2 and so we've actually provided in Q2.

Howard Lutnick

So it's multi year because it's commitment to do the charity going forward. This is really the GAAP charge of multi years of it, so it doesn't affect the -- and it would have been a GAAP charge anyway, it's really doesn't have any – it won't have any effect on DE had we done the old way or this way but this is just we committed to do it, we took a charge in it and that charge is the lion share of this non cash charge

Patrick O'Shaughnessy - Raymond James

Okay, so substantially bigger than around $10 million to $10.5 million charges you taken in previous years.

Graham Sadler

Yeah because this covers multi years

Patrick O'Shaughnessy - Raymond James

Okay, so kind of just think about at least your gap for Q2 years that's not probably going to be charged going forward?

Graham Sadler

Yes.

Patrick O'Shaughnessy - Raymond James

Okay, thank you for that color. A legal question for you. Tullett Prebon in its earnings release they talked about how they expect resolution on their lawsuit against you guys by the end of this year. Is that consistent with your expectations and if you can provide any color on the proceedings that will be useful.

Howard Lutnick

I think the answer is yes for part

Patrick O'Shaughnessy - Raymond James

And you expect the part of the case to be resolved and part of it to continue beyond this year?

Howard Lutnick

Well, they have brought so many cases. The last particular one, we had a positive result and they had to actually, they brought the case, our brokers have brought a counter suit and that result was Tullett lost its case and the brokers received money hundreds of thousand of dollars we pay to them from Tullett, so that was the last determination in one of these cases. And we do expect one of the cases to resolve, but we will see after that. We will see

Patrick O'Shaughnessy - Raymond James

Okay, understood. And one last one then I'll jump back in a queue. Graham, you talked about you paid some debt during the quarter, I think is that correct has decreased $28 million year-to-date, can you just talk about which one of your debt component has actually been paid down and how are you going about that?

Graham Sadler

Now this is actually predominantly part of the NASDAQ transaction where we repaid a positive so financing lease financing debt.

Patrick O'Shaughnessy - Raymond James

Okay, that's helpful, alright; I'll jump back in the queue. Thanks guys.

Operator

Thank you. And your next question comes from the line of Niamh Alexander. Please proceed.

Niamh Alexander - KBW

Hi, thanks for taking my questions. And can you just expand a little bit on the distribution I want to just make sure I understand it correctly, the employee loan will balance with that cash you paid out in the past for them that you kind of recorded as an asset or something or what is that? Is it kind of sometimes you pay cash bonuses and what is it forgiving a loan or something so cash bonus as you paid in the past that you no longer recording as an asset or –

Howard Lutnick

Yeah this is cash paid out as loans to employees in the past.

Niamh Alexander - KBW

And was it as loan as in bonuses or something like that or why you writing it I don't know.

Howard Lutnick

So we used, so we had loans to our employees which we expected to be repaid. And by reducing the value on a books we obviously have the expectation that we may not get repaid, and the point of that is to the extend they don't repay us that value plus the taxes we paid on their behalf, you add those two together and we've reduced that units factors employee had those two net each other out at about $6.24. So if you think about it sort of in general way the employees have effectively right repaid the taxes, number one. We expect that they'll pay back less of the loan, number two. And if you add those two things together, right, you get $6.24 and they had less or they less shares less units by 32.2 million. So, it's sort of those are the two expenses and the benefit is the 32 million shares so 201 million will be gross sort of cost to the company doing this, and the benefit is 32.2 million shares, and that just it's a good way to look at it. Because it shows that it's about $6.24 was the effective cost to the company and the benefit was retiring redemption of 32.2 million shares.

Niamh Alexander - KBW

So have you forgiven those loans? Is that because I guess they were kind of cash bonus to the previous forgive the loans for tax purposes, are the loans forgiven, are you saying you are not expecting to be repaid of course you are forgetting them.

Howard Lutnick

Well, if we put up reserve against that receivable because that's a more prudent thing for the company to do. If we did, if we had completely forgiving it then we could never possibly get paid the money, so we set up a reserve against it because in the famous words – you never know. You know as our business is do better, as people do better there may be an opportunity to collect on those loans later. But we have correctly analyzed them and set up a reserve against that receivable. But if we write it off we get, you get a closed up amount and you get a tax deduction, and those two things just go against each other. And so that's how it works. So if you look at it, into it rather than having employees pay back all the money and then buying the units from them with that money, we've just used those two against each other but we've done it in a more clever way for the company and rather than writing off the notes we've just reserved them because there may be the possibility that opportunity comes in the future where we could collect on the notes. Now remember these particular notes were only paid back from distribution from the part, so that was the particular part of the note and makes it you know sort of special

Niamh Alexander - KBW

Okay, so that were the kind of dividend goes directly towards kind of repaying the loan rather into the bank accounts of the employees or something like that. Is that correct?

Howard Lutnick

Say it that again

Niamh Alexander - KBW

Is way your dividend distribution have historically gone towards repaying those loans for employees rather than kind of into their bank accounts, is that kind of what you are – is that feasible?

Howard Lutnick

Correct, so before they used to take the distributions and pay the note distribution when they pay these notes now they are, we expect their dividend from the stock will pay those notes. But obviously since we redeemed 32.2 million of them right they just have less shares you know to pay the notes so we have to sort of preserve against because that math

Niamh Alexander - KBW

Okay, so is that done now with respect to these are the policies you have got you said there was $200 million there kind of allocated towards kind of pay partner insider and the ownership is now down to 34%. So is that part of is done for now with respect to the deal or could there be something else next quarter and adjustment if you kind of see those good acceptance of a new employment agreement, could you potentially change it?

Howard Lutnick

I mean at this point the deal is done, there may be some little bit of noise probably next quarter as we go through particular people plus and minus a little bit, but nothing consequential, so this part of arrangement is done.

Niamh Alexander - KBW

Okay, fair enough

Howard Lutnick

And so what will do next quarter or any other time as we have the cash and we may and we said rather payoff debt, we may buyback units, we may buyback shares and we do expect to buyback units from buyback shares overtime, we do expect to pay our debt overtime, and we do expect to accretively invest in and how we do them in what level we do them we will be presented itself overtime.

Niamh Alexander - KBW

Okay, fair enough. I guess my next question was like on the tax, I mean can you give me little bit more color on may be how much, could you – you know look quite few definition as one that counter BCG convert and there is a resale offering and help me think about may be how you think about prioritizing which item you kind of address or so which one will be most attractive kind of paid down for us.

Howard Lutnick

I think our next that the next maturity of our convert was issued during the crisis, right, during the financial crisis and the coupon is high we would like and look forward to that not being there.

Niamh Alexander - KBW

That's one you enter because due to the counter or sort of public

Howard Lutnick

Yeah, it came to body because we paid a higher price than elsewhere

Niamh Alexander - KBW

So that's about 160 million, I correct

Howard Lutnick

Yes.

Niamh Alexander - KBW

Okay. Alright, thank you. That's helpful and then just back to the Tullett thing if I could. Have you reserved anything for that so far?

Howard Lutnick

We don't comment on that

Niamh Alexander - KBW

You don't comment on reserves, okay. And alright, fair enough an and then you back to the kind of core business what you guys do everyday you know that the rates business I guess you just back to Rich's question, I beg you pardon Rich, and you know I know you talked about QE generally but you know June was huge and QE kind of all the uncertainty like QE actually draw with a ton of volume in the rates market and a lot of positioning and a lot of repositioning, so it was a bit odd not to see that flow through to actually higher volume higher revenue in eSpeed and so you know kind I have another go and see kind of – generally I get what you are saying about QE kind of limiting activity overall but we did see a lot of activity in that month but it doesn't seems to have translated to revenue there.

Howard Lutnick

Right, June was good. If April were June and May I guess but June is just math and is I think you know nothing special about it. The volumes were, volumes there. Math is the math and I don't anything –

Niamh Alexander - KBW

Okay, fair enough. And the SEF I guess you haven't applied yet, a few others have started already it's like you know October is approaching to when these things takes back I mean should we, is there some risks that you might not see kind of ready when you need to go on that days in October and then help me understand is just because Bloomberg is still kind of prolific in the industry and people do so much, so many trades on Bloomberg and now there are SEF so in a way there kind of going to competing a little bit more directly with you and as a trading venue, how you would drive that with your plan?

Shaun Lynn

Regards to client for exception attraction, we are on target, we feel comfortable and we will be applying. As for competitors such as Bloomberg or many other competitors we fight them everyday, competitors such as Bloomberg and many others. They are showing this as traditional competitor, they all – we all occupy different parts of the market and sometime we compete against each other in same part. So we are comfortable

Niamh Alexander - KBW

So you don't see them as kind of, you don't see any potential change to the market structure or anything like that would the –

Shaun Lynn

Well, I think the market is going to change and it has changed dramatically already with the customer base is wide and out. The types of products now been electronic trade without and without this is growing significantly, collaboration between ourselves and some of our customers is happened as you know. And you can expect that come from us too. So now just generally the market is changing, it's evolving, it's exciting. I think there is great opportunity going forward for us in this space

Niamh Alexander - KBW

Okay, fair enough.

Howard Lutnick

I think Shaun is exactly right which is that as you know the discussion of the dot Frank has multilateral platform being a key part of that meaning clients will not do business in a private narrow setting; they are supposed to be doing business in a broad setting. That business has never been sort of included in our opportunity, and now it will included in our opportunity, so you are talking about a much larger opportunity together with many other competitors, right but it's really a much larger opportunity with many other competitors and I think Shaun said it simply we just like our chances, and now we competed very successfully across all these types of businesses before. And we expect you make the rule, expand the client base and given our tools and our knowledge base being a broker and the brokers business and what we are good at we're just better at doing what we do than virtually anyone else in the world and the more things you bring into multi lateral, multiple buyer, multiple sort of market place, the better we thing BGC does.

Niamh Alexander - KBW

Okay, fair enough, Howard. And I guess I get back in the line, thanks.

Operator

Your next question comes from the Michael Wong. Please proceed

Michael Wong - Morningstar

Good morning.

Howard Lutnick

Good morning

Michael Wong - Morningstar

Do you expect your modified equity competition program to actually change your compensation ratio on a GAAP or distributable earnings basis or possibly just shifted to more cash instead of equity

Howard Lutnick

Overtime we would expect it to decrease but nothing macro. That the micro is as we grow our real estate business materially those brokers come in at higher compensation ratio than by financial service people but they come in with less other sort of technology support cost than our financial service people. So, the comp ratio we would expect to decline overtime in financial services but because of the growth of our real estate business it may not present itself as simply. That's overtime nothing in a short period.

Michael Wong - Morningstar

Okay. And just a quick question, how does the regulatory and SEDAR affect your confidence and pulling the trigger for hiring more brokers and doing a material acquisition?

Howard Lutnick

Talented people and successful people, we are always interested in hiring, right, no matter what the rules, what are the regulations, what are the platforms, whether with the whatever you throw at a talented person knows people who understand the business, they're successful, so we are interested in hiring talented people and you know we have our view on the business going forward and if the company presented itself that was attracted to us to where we think the world is going and that's we set up business risks that we are comfortable taking. We understand our business, and we understand platform going forward, we think and that we are confident in our view going forward and if we can find the right company at the applied price on the right terms we will be happy to make those moves today. I mean the rules are basically been discussed a lot. So, I mean I think we have a sense of where they are going and we are confident.

Michael Wong - Morningstar

Okay, thank you.

Operator

Thank you. We have no further questions. (Operator Instructions).

Howard Lutnick

Operator?

Operator

We have no further questions.

Howard Lutnick

So thanks everyone for joining us today. And we look forward to speaking to you next quarter, and update you towards the end of the quarter. Have a great day today, and we look forward to speaking to you soon.

Operator

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good Day.

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