MF Global files bankruptcy, cites lack of alternatives for U.S. unit

By Caroline Salls

Pittsburgh, Oct. 31 - MF Global Holdings Ltd. filed Chapter 11 bankruptcy on Oct. 31 in the U.S. Bankruptcy Court for the Southern District of New York.

President and chief operating officer Bradley I. Abelow said in a statement filed with the court that the Financial Industry Regulatory Authority (FINRA) told the company in September that its U.S. operating subsidiary was required to modify its capital treatment of some repurchase transactions to maturity collateralized with European sovereign debt and increase its required net capital.

Moody's Investor Service subsequently downgraded its ratings on the company to one notch above junk status on Oct. 24 based on its belief that MF Holdings would announce lower than expected earnings.

On Oct. 25, the company revealed that it posted a $191.6 million net loss in the second quarter, compared with a loss of $94.3 million for the same period last year.

Dissatisfied with the September announcement by MF Holdings of the U.S. subsidiary's position in European sovereign debt, Abelow said FINRA demanded that the holding company announce that the subsidiary held a long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity, including Belgium, Italy, Spain, Portugal and Ireland.

Abelow said these countries have some of the most troubled economies that use the euro.

"Concerns over euro-zone sovereign debt have caused global market fluctuations in the past months and, in particular, in the past week," Abelow said in his statement.

"These concerns ultimately led last week to downgrades by various ratings agencies of MF Global's ratings to junk status."

Abelow said this sparked an increase in margin calls against the U.S. subsidiary, threatening the company's overall liquidity.

As a result, Abelow said some of the U.S. unit's principal regulators "expressed their grave concerns about MFGI's viability and whether it should continue operations in the ordinary course."

Abelow said the company explored a number of strategic alternatives for the U.S. subsidiary, but "no viable alternative was available in the limited time leading up to the regulators' deadline."

Business suspension

According to a news release, the Federal Reserve Bank of New York has informed MF Global Inc. that it has been suspended from conducting new business with the New York Fed until the company establishes that it "is fully capable of discharging the responsibilities set out in the New York Fed's policy" or until the New York Fed decides to terminate MF Global's status as a primary dealer.

In connection with the filing, the company requested court approval to use the roughly $26 million in cash collateral of its liquidity facility lenders to fund its operations while in bankruptcy.

Debt details

According to court documents, MF Global had $41.047 billion in assets and $39.684 billion of debt as of Sept. 30.

The company's largest unsecured creditors include:

• Indenture trustee JPMorgan Chase Bank, NA, with a $1.201 billion bond debt claim;

• Indenture trustee Deutsche Bank Trust Co. Americas, with a $325 million 6.250% bond debt claim, a $325 million 3.375% bond debt claim, a $287.5 million 1.875% bond debt claim and a $78.62 million 9% bond debt claim; and

• Headstrong Services, LLC of Fairfax, Va., with a $3.94 million claim.

The company is represented by Skadden, Arps, Slate, Meagher & Flom LLP.

Special administrators

In a separate news release, the Financial Services Authority (FSA) confirmed that MF Global UK Ltd. has entered the special administration regime, and Richard Fleming, Richard Heis and Mike Pink of KPMG LLP have been appointed as joint special administrators.

The FSA said the regime was adopted in February 2011 following the collapse of Lehman Brothers and sets special objectives for the administrator, including the swift return of client assets and the timely engagement with market infrastructure.

SIPA liquidation approved

In addition, the Securities Investor Protection Corporation (SIPC), which maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms, announced that it was initiating the liquidation of MF Global Inc., under the Securities Investor Protection Act (SIPA).

The SIPC said it filed an application on Oct. 31 with the U.S. District Court for the Southern District of New York for a declaration that the customers of MF Global Inc. are in need of the protections available under the SIPA.

The court granted the application and appointed James W. Giddens as liquidation trustee, the release said. Hughes Hubbard & Reed was appointed as Giddens' counsel.

"When the customers of a failed SIPC member brokerage firm have left their securities in the custody of that firm, SIPC acts as quickly as possible to protect those customers," SIPC board chairman Orlan Johnson said in the release.

MF Global is a commodity and derivatives broker based in New York. The Chapter 11 case number is 11-15059.

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