Penson rebounds from failed restructuring, sells futures business

By Lisa Kerner

Charlotte, N.C., June 7 - Penson Worldwide, Inc. chief executive officer and co-founder Phil Pendergraft provided an update on his company's recent announcements regarding the sale of its futures business and the formation of a new clearing company following Penson's recent failed exchange offer.

During a conference call on Thursday, Pendergraft noted that his update would be short on numbers and acknowledged that the poor macroeconomic environment has been tough on Penson.

In March, the company's restructuring support agreement with the holders of a majority of its senior second-lien notes, the holders of more than 70% of its 8% senior convertible notes due 2014 and Broadridge Financial Solutions, Inc. was automatically terminated because Penson did not launch a proposed exchange offer.

According to Pendergraft, the senior note holders, the convertible holders and Broadridge all had different objectives and getting them to work together was "very challenging."

Also, "certain of the parties had a great deal of skepticism about our ability to stabilize the business financially given our cost and capital structure," Pendergraft said.

The company's board considered alternatives and looked for one partner for all of its businesses. Unsuccessful in the search for an ideal partner, Penson moved ahead with the two previously announced deals and is considering another transaction in Canada, said Pendergraft.

Last week, Penson announced it agreed to sell some assets and liabilities of the futures division of its U.S. broker-dealer subsidiary, Penson Financial Services, Inc., to Knight Capital Group, Inc. for $5 million plus future earnouts for the next three years.

Pendergraft said Penson expects to book "a small gain" on this transaction.

"This sale improved our capital and liquidity without negatively impacting profitability," he said.

Formation of Apex

More recently, the company announced a strategic transaction with PEAK6 Investments, LP to launch Apex Clearing Corp.

"We believe we needed a strong partner to ensure stability for our customer base," Pendergraft said of PEAK6.

The resulting transaction will reduce Penson's expenses by $20 million a year.

Pendergraft expects the new firm to be cash flow positive in the first year and to "grow meaningfully as the environment improves."

In connection with the transaction, Broadridge is forgiving a seller note with principal and interest of $22 million. Broadridge received the note when it sold the clearing and execution business of Ridge Clearing & Outsourcing Solutions, Inc. to Penson in 2009.

The formation of Apex will reduce the obligation of the Penson companies and leave Penson with two operating businesses, Penson Financial Services Canada and Nexa Technologies, Inc.

In addition, the transactions will free up regulatory capital since Penson Financial Services will no longer operate as a correspondent clearing broker, dramatically reducing the firm's capital and liquidity needs, according to Pendergraft. Penson will release more information at a later date regarding exact figures.

Future plans

Penson is in "advanced discussions" regarding the final direction of Penson Financial Services Canada and expects to exit that market and eliminate the remaining $20 million change-of-control obligation to Broadridge, said Pendergraft. In the meantime, the Canadian business remains "well capitalized and serving clients."

In the near term, Penson plans to focus on its Nexa technology business and expand its market share to include expanding the patent portfolio for new licensing opportunities, Pendergraft said.

Dallas-based Penson Worldwide provides execution, clearing, custody, settlement and technology infrastructure products and services to financial services firms.

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