Fitch Affirms BGC at 'BBB-'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed BGC Partners, Inc.'s (BGC) Long-Term Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook.

Fitch has also affirmed the 'BBB-' rating of BGC's parent company, Cantor Fitzgerald, L.P. (Cantor). For more information on this rating action please see 'Fitch Affirms Cantor Fitzgerald at 'BBB-'; Outlook Stable' dated Sept. 30, 2016.

KEY RATING DRIVERS

IDRS AND SENIOR DEBT

The affirmation of BGC's ratings reflects the company's established franchise in the inter-dealer broker (IDB) space, which has been further enhanced by the acquisition of GFI Group Inc. (GFI). Fitch's expects improved earnings from this transaction, given the ability to generate sufficient synergies from integrating GFI. Fitch believes this will help the combined entity to be operated with appropriate leverage and interest coverage metrics.

Additionally, the company is further diversifying its revenue composition with its growing commercial real estate (CRE) brokerage business, which is helping to diversify its revenue stream, which over time should add some stability to earnings.

Ratings continue to be constrained by the cyclical nature of the brokerage businesses as well as structural regulatory reforms that are impacting the volumes and profitability of the IDB business. Fitch also continues to believe that elevated strategic key man risk associated with Cantor's CEO voting control of BGC is a constraint to the ratings.

BGC's ratings are currently equalized with those of its parent, Cantor Fitzgerald LP (Cantor), as Fitch considers BGC to be a core subsidiary of Cantor reflecting the meaningful ownership of BGC by Cantor, the voting control Cantor maintains over BGC, and the shared management teams, operations and systems.

BGC's acquisition of GFI, which was completed Jan. 12, 2016, was accretive to BGC, increasing the company's market share in the IDB space, diversifying its product offering, and providing cost synergies. Although BGC's and GFI's front-office brokerage businesses remain separately branded, BGC has integrated GFI's back office, technology and infrastructure operations, resulting in cost savings estimated to reach $125 million annually and increased cash flows, which have returned leverage, interest coverage and liquidity to BGC's long-run averages.

BGC's leverage, as measured by gross debt-to-adjusted EBITDA, was 3.1x for the trailing 12 months (TTM) ending June 30, 2016 compared with 2.2x for the TTM ending Dec. 31, 2015. The increase was attributed to GFI acquisition (the latter operated with higher leverage) and a $300 million new debt issuance in June 2016. Adjusting for the $160 million convertible notes repaid on July 15, 2016 and for the run rate cost synergies from the GFI acquisition, Fitch calculates that pro forma leverage was 2.2x, which is consistent with Fitch's 'BBB' rating category quantitative benchmark for securities firms with low balance sheet usage of 1.5x-2.5x.

Interest coverage, as measured by adjusted EBITDA-to-interest expense, was 5.9x for the TTM ending June 30, 2016, compared to 5.4x for 2015. Pro forma for the July convertible debt maturity and GFI synergies, Fitch calculates that interest coverage improved to 7.1x, which is in line with Fitch's 'BBB' rating category quantitative benchmark for securities firms with low balance sheet usage of 6.0x-10.0x. At June 30, 2016 BGC had $899 million in liquidity consisting of cash, cash equivalents and marketable securities. This is sufficient to fulfil the firm's operating needs in Fitch's view, particularly in light of no debt maturities until 2018.

BGC's profitability margin, as measured by EBITDA/revenues measured at 14.4% for the TTM ending June 30, 2016 decreasing from 16.7% in 2014, and is consistent with the higher end of Fitch's 'BB' rating category quantitative benchmark for securities firms with low balance sheet usage of 10-15%. Margins came under pressure as a result of persistently low market volatility in the period (which typically results in slower business activity for inter-dealer brokers) and the consolidation of GFI, which operates with lower margins on a standalone basis. Potential additional cost-savings from the GFI acquisition, expansion of higher-margin electronic platforms, slightly more favorable market conditions, and increasing real estate brokerage earnings may offset operating environment challenges.

RATING SENSITIVITIES

IDRS AND SENIOR DEBT

Positive rating momentum, although limited in the medium term, could be driven by continued growth and diversification of the brokerage platforms, such that earnings prove to be more durable over multiple operating cycles, a sustained increase in profit margins, maintenance of conservative leverage and interest coverage metrics and a reduction in key man risk.

Ratings could be adversely affected by an inability to improve EBITDA or reduce debt levels, which leads leverage to rise above 2.5x or interest coverage to fall below 6x, on a sustained basis. Increased shareholder-friendly activities, including increased dividends or outsized share buybacks or if the departure of Cantor's CEO leads to adverse shifts in the firm's risk appetite, would also be viewed negatively from a rating perspective.

BGC's ratings are expected to remain equalized with those of its ultimate parent, Cantor, as Fitch considers BGC to be a consolidated core subsidiary of Cantor due to the significant operational, financial and managerial linkages between them. As a result, any changes in Cantor's ratings could also result in changes to BGC's ratings.

GFI's senior unsecured debt rating is linked to BGC's rating, and is based on an unconditional guarantee from BGC, and therefore is sensitive to changes in BGC's rating

Fitch has affirmed the following ratings:

BGC Partners, Inc.

--Long-Term IDR at 'BBB-';

--Short-Term IDR at 'F3';

--Senior unsecured debt at 'BBB-'.

GFI Group Inc.

--Senior unsecured debt at 'BBB-'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884128

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012484

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012484

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Source: Fitch Ratings

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