MF Global Offering Stuns Street

Futures broker’s bonds will pay higher rate if CEO Corzine quits.

MF Global Holdings Ltd. took the cult of the Wall Street chief executive officer to a new level with a plan to sell bonds that pay a higher rate if Chairman and CEO Jon Corzine quits to take a job from the U.S. president.

The futures broker is selling $300 million in five-year unsecured notes, said a person familiar with the offering who declined to be identified because the terms aren’t final. The notes will pay an extra percentage point of interest if Corzine is named to a federal post and confirmed by the Senate before July 2013, New York-based MF Global said in a regulatory filing.

“That seems crazy,” said William Larkin, a fixed-income portfolio manager who oversees $500 million at Cabot Money Management Inc. in Salem, Massachusetts, and has 22 years of experience. “I’ve never heard of something like this.”

Corzine, the 64-year-old former governor of New Jersey, helped run Goldman Sachs Group Inc. from 1994 to 1999 and served in the Senate from 2001 to 2006. Since joining MF Global last year, he’s taken more risk with the firm’s money in a bid to remake the broker into a mid-size investment bank and has sought to alter its capital structure to reduce borrowing costs. The shares rose 9.5 percent in the past year under his watch, while the Standard & Poor’s 500 Financials Index fell 4.9 percent.

A Democrat, Corzine is among the biggest fundraisers for President Barack Obama’s 2012 re-election campaign. He has been the subject of speculation about administration jobs such as Treasury secretary or White House economic adviser, said Christopher Allen, an analyst at Evercore Partners Inc. in New York.


Retention Bonus
Jay Carney, the White House press secretary, said he had “no knowledge” that Corzine was being considered for an administration post. He declined to comment on the bond sale.

Corzine’s employment contract is written with a view to future government service. It stipulates that he’ll be paid his $1.5 million retention bonus on a pro rata basis if he leaves to work for any “U.S. federal, state or local government” before March 31, 2014.

Five senior Wall Street executives at rival firms, who declined to be identified because they weren’t authorized to comment, expressed amazement at the bond offering’s unique terms. Hedge funds sometimes allow investors to withdraw their money if a star manager or founder, designated a “key man,” leaves the company.

Diana DeSocio, an MF Global spokeswoman, said she couldn’t comment because the company is in the offering period for the bond.


‘Extra Protection’
“I can’t say I’ve ever seen a provision similar to this one,” said Alexander Diaz-Matos, an analyst at New York-based Covenant Review LLC, which analyzes bondholder protections. “Apparently Corzine is a big enough deal to the company that if he leaves, potential investors demanded a little extra protection.”

Larkin said he was surprised that the interest-rate change on the bonds applies only if Corzine leaves for a government job and not in any other circumstance.

“To have it so specific makes it even more unusual,” said Diaz-Matos.

Proceeds from the sale will be used to repay a bank credit facility and for general corporate purposes, said the person familiar with the terms. Jefferies & Co. is managing the bond sale, according to the filing, which didn’t specify the size of the offering.


Investor Concern
The idea for the Corzine step-up provision emerged from Jefferies bankers working on the deal, according to one person with direct knowledge of the discussions, who asked not to be identified because the talks were confidential. The Jefferies bankers indicated they wanted to head off any investor concern that Corzine might leave, the person said.

Moody’s Investors Service ranks MF Global Baa2, the second-lowest investment grade, while Standard & Poor’s rates it BBB-, one step lower. The interest rate will also rise if Moody’s or S&P cuts the company’s debt grade to junk, the regulatory filing shows.

A rate increase of 1 percentage point, or 100 basis points, is the least that bondholders should seek as protection against a Corzine departure, said Sean Egan, president of Egan-Jones Ratings Co., a credit rating company.

“We believe Corzine is worth more than a 100 basis-point increase,” Egan said. “Corzine’s departure is a major risk and the bond step-up in rate is addressing the risk.”

The innovation reminded Egan of Michael Milken, who helped create a market for the debt of smaller and riskier companies by issuing high-yield securities in the 1980s.


‘Rock Star’
“Milken would be proud of the structure since it addresses a major concern,” he said.

Larkin, who said he owns bonds in Wall Street firms including Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co., said he doubts the idea will catch on at other companies. Corzine is a unique case, he said.

“I’m guessing this is a one-time thing -- he does have sort of a rock-star component to him because people believe in his ability to turn around the firm,” Larkin said. “The management should never be one person. If it’s one person that’s critically important, I tend to avoid the company just because I’m trying to establish stable income and return of principal.”

MF Global was named a primary dealer by the Federal Reserve Bank of New York and has hired more than 80 salespeople and traders this year.

Even with the additions, Corzine has cut costs by reducing the firm’s workforce by 5.5 percent and delivered unadjusted profit last quarter. Prior to that period, the firm was unprofitable on a generally accepted accounting principles basis in eight of the previous nine quarters.


Middle of Turnaround
Net revenue per employee has risen to $110,000 for the three months ended in June, compared with $93,000 a year earlier, the company said last week. At the same time, Corzine brought the ratio of employee compensation to net revenue down to 54 percent from 63 percent in the June quarter of 2009.

Net income climbed to $7.67 million, or 5 cents a share, in the period ended June 30, compared with $783,000, or 1 cent, a year ago, the company said July 28.

Last week, the firm said it planned to buy back $109.1 million of 9 percent outstanding convertible notes with the proceeds from a sale of $325 million of 3.375 percent securities maturing in August 2018.

The interest-rate increase under the key man provision will reverse if MF Global is upgraded to at least A3 by Moody’s or an equivalent A- by S&P after a departure by Corzine, according to the regulatory filing.

It’s no surprise that major MF Global investors would be nervous about the potential impact of a Corzine departure, said Niamh Alexander, a New York-based analyst at KBW Inc. “There aren’t that many former senators that are running public companies that are in the middle of a turnaround.”


Bloomberg News

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