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Any Value in MF Global Credit Structure?


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The $325 million of 6.25 percent bonds, due in August 2016, fell 24.8 cents yesterday to 63.8 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The tumble brought the yield on the bonds to 17.83 percent, or 16.8 percentage points more than comparable-maturity Treasuries, according to Trace the bond- price reporting system of the Financial Regulatory Authority.


Issuer name (symbol) Coupon % Maturity Moody's S.&P. Fitch Last Change Yield %

Mf Global Hlds MF.AD 6.25% Aug '12016 Baa3 BBB- BBB 50 0.00 24.64%

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The problem with a situation like this is that the longer it takes for the company to sell all or parts of its business, the faster the business value declines. But there is value here if customers stay. MF Global can be thought of two different sorts of businesses: A broker dealer and a futures commission merchant. To me, the value really lies in the futures commission merchant as we've seen a number of broker dealers shutter its door in the past few months, and any potential purchasers would have to take the aforementioned Eurozone sovreign risk. On mitigating factor here though is that as customer accounts leave the door, assuming no mark down on repos sales, MF will be required to hold less capital. In fact, if MF sells its entire futures business, it could free up a substantial amount of capital depending on how the deal was structured.


Complicating things further are the subordinated intercompany loans granted to the broker dealer from MF Global, LTD ($130M) and MF Global Finance USA Inc. ($425M). These are assets of these entities and assuming residual value flows up from MF Global, Inc, this would factor into the recoveries of the various securities -> hence why the extended and non-extended revolver are trading at a premium to the unsecured bonds and converts (i.e. the credit facility benefits from the MF Global Finance USA Inc.'s $425M intercompany loan whereas the bonds do not).

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