MF Global Blows Another Tire

Engine room: More retreads!

Shares of MF Global Ltd (MF) took another 40 percent pratfall Wednesday, after the embattled futures brokerage buried—but nowhere near deep enough to be overlooked—yet another profit warning, in a press release largely devoted to a previously announced $300 million fund-raising effort expected to price this week.

The tumblage—to $7.83—drops the stock 37 percent below the $12.50 at which private equity investor JC Flowers & Co LLC agreed last month to backstop the $300 million offering of $150 million of convertible preference shares and $150 million of convertible senior notes; both can be increased by up to 20 percent under options to be granted to the original purchasers. Flowers is on the hook for at least $150 million in a separate series of converts, along with, essentially, whatever it takes to get the total up to $300 million.

Several factors appear to be driving MF Global’s headlong rush to incorrigible not-for-profit status, including one inadvertently overlooked in the press release: a widening gap between chief executive Kevin “Cappuccino Man” Davis’s “strong performance in the current quarter” rhetoric as recently as the May 20 conference call, and reality.

• Business...ummm...sucks. Net revenue for the quarter ending Jun. 30 is put in the range of $360-390 million; it’s not clear whether that’s comparable with the GAAP $412.7 million, or MF’s preferred measure of $464.1 million in “adjusted net revenues” for the prior quarter. Either way, if you took the under, you won.
• Client assets at the end of May were approximately $15.4 billion; flat on the $15.3 billion at Mar. 31, but still far below the $19.5 billion reported Dec. 31 2007. Davis attributed the decline to a combination of customer losses and end-year “sweeps of excess collateral,” carefully avoiding MF Global-specific issues engendered by the still mysterious dispatch of chief financial officer Amy Butte in pursuit of other interests and the $141.5 million rogue wheat-trader debacle, along with non-MF Global-specific enhanced customer attentiveness to the safety of funds at hinky financial institutions.
• Lower customer balances, “the narrowing of short-term credit spreads”, lower net interest income, lower pre-tax margins. QE-bloody-D.
• A total contract volume estimate for the current quarter of 530-580 million lots. That’s less than the record 594.4 million contracts in the prior quarter, and marks a softening of the 40 percent growth rate in both the quarter and the year to Mar. 31.
• Finally, fallout from February’s rogue wheat-trader scandal is still having its way with the bottom line, with MF owning up to so far unspecified and inestimable “increased non-compensation costs...as a result of ongoing changes to its business information, risk management and monitoring systems, and corresponding increases in professional fees.”

In other words, busted trades all round. Drinks at The Core Club!

Disclosure: Long MF (sigh). NakedShorts’ Falling Anvil portfolio added shares Thursday at $8.00. Half what Davis & Co paid in the Feb. 29 Evan Dooley Memorial | Touching Display of Faith.

MF Global to Offer $150 Million of Convertible Preference Shares
MF Global press release, Jun. 17 2008

MF Global Ltd Fiscal 2008 Earnings Call Transcript
Seeking Alpha, May 20 2008