MF Global (MF) has been taking a pounding in the last couple days after a huge quarterly loss in its second fiscal quarter 2012. Its GAAP net loss was $191.6 million, or $1.16 per share. Adjusted loss per share was $0.09.
Since the quarterly report on October 25, MF share value has dropped about 60% to $1.45 a share as I write this. It has experienced an investment grade drop by Fitch to BB+ from BBB, or below investment grade, and S&P may do the same. This downgrade caused MF to continue its plunge. Now, customers are thinking about leaving the company, as its executives scramble to reassure investors it won't be the next Bear Stearns or Lehman Brothers. Fitch said:
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.
Shareholders are keeping the stock alive because they are looking at book value. Current book value is at about $7.20, or a bit more because of the recent rise in the value of euro bonds. $7.20 is a lot more than the firm's current share price of $1.45.
However, being in a distressed state, MF's assets aren't worth quite what they seem to be. In the reported second-quarter results, MF's total assets are recorded to be $41 billion, and its liabilities are about $39.6 billion. If the assets are written-down to as little as 95 cents on the dollar, or $2 billion less, that puts its stockholders equity at $39 billion, for a negative book value. It's also useful to note how much leverage it's using: about 30 to 1, the same as Lehman Brothers had. To put this in perspective, Goldman Sachs (GS) has about 13 to 1 leverage and Morgan Stanley (MS) about 14 to 1.
Right now, MF is looking to sell its futures business within days. "The firm’s futures unit could sell for around $765 million, equivalent to $4.60 per diluted share," Niamh Alexander, an analyst with KBW Inc. in New York, wrote in a note to clients today. She estimated the futures unit accounted for $1.02 billion of group tangible book value, which includes the firm’s broker-dealer unit, and could sell for 75 percent of that." According to Alexander, this part of the business would be sold for 75% of book value -- quite a bit lower than 95%.
In a Bloomberg interview, Dick Bove, analyst at Rochdale Securities, said that MF will have to sell assets at depressed prices. He says that Goldman Sachs can make a lot of money buying the assets on the cheap from MF. Bove also said that MF would have to sell any of its $6.3 billion of euro bonds at a below-market rate.