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S&P Lowers GFI Group (GFIG) to 'B'; Cites Weak Brokerage, Profitability Metrics

June 19, 2014 2:12 PM EDT

Standard & Poor's Ratings Services said today that it lowered its issuer credit and senior unsecured debt ratings on GFI Group Inc. (NYSE: GFIG) to 'B' from 'B+'. The outlook is stable.

"The downgrade reflects continued weakness in GFI's brokerage revenue and profitability metrics, as well as decline in its on-balance-sheet liquidity, because of lower trading volumes and increased costs of complying with regulation," said Standard & Poor's credit analyst Sebnem Caglayan. These dynamics have resulted in weaker credit metrics that we believe are aligned with a 'B' issuer credit rating.

Our rating on GFI reflects the company's position as a small firm in the intensely competitive, low-margin, and relatively narrow institutional agency brokerage business. The company heavily relies on market-dependent trading volumes to generate revenues (especially over-the-counter [OTC] derivative volumes). GFI's generally accepted accounting principles (GAAP) brokerage revenues, pretax profits, and on-balance-sheet liquidity weakened in 2013 and first-quarter 2014, relative to prior comparable periods, because of low industrywide trading volumes, increased regulation, and new entrants into the interdealer broker industry, which we view as negative rating factors. We believe the cost of complying with increased regulation will continue to weigh on GFI's credit metrics. GFI's agency brokerage model, which is inherently less risky, and recent growth in electronic trading platforms (like Trayport and Fenics), which has the potential to somewhat replace lost revenue and profits in brokerage business, only partially offset the negative rating factors.

The stable outlook reflects our view that GFI's liquidity will remain strained, although we expect GFI to operate with an EBITDA-to-interest coverage ratio of above 3x and debt-to-EBITDA leverage of below 3x in the next 12-18 months. If pressure on brokerage revenues as a result of heightened regulation, low volatility, and low market volumes results in further deterioration in GFI's liquidity and credit metrics (such that interest coverage falls below 3x and leverage goes above 3x), we could lower the ratings. While unlikely over the near term, if GFI is able to replace a substantial portion of the decline it expects in brokerage revenue with software, analytics, and market data revenue, such that its credit metrics are substantially better than we expect, including leverage improving to below 2x on a sustained basis, we could raise our ratings.



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