News Column

Fitch Affirms BGC at 'BBB-'; Outlook Stable

June 24, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed BGC Partners, Inc.'s (BGC) ratings as follows:

--Long-term Issuer Default Rating (IDR) at 'BBB-';

--Senior unsecured rating at 'BBB-';

--Short-term IDR at 'F3'.

The Rating Outlook is Stable.

Inter-dealer brokers (IDBs) continue to face a challenging operating environment as global trading activity remains subdued reflecting persistently low volatility, the more onerous regulatory environment for their dealer clients, and the uncertainty associated with structural regulatory reforms of the over-the-counter (OTC) derivatives markets. Fitch believes some of these trends will continue impacting brokerage revenues in the near to intermediate term.

However, discipline on expenses, particularly compensation and debt pay downs have helped stabilize profit margins, leverage and interest coverage metrics for most IDBs. A return to aggressive compensation practices or large cash/debt funded acquisitions could put pressure on the IDB sector or individual companies.

KEY RATING DRIVERS

The affirmation reflects BGC's established franchise in the inter-dealer broker (IDB) space, its growing commercial real estate (CRE) brokerage business, which is helping to diversify its revenue stream, low credit and market risk profile, and appropriate leverage and interest coverage metrics. The ratings also take into account the cyclical nature of the two brokerage businesses and structural regulatory reforms which are impacting the IDB business. Finally, BGC's ratings are linked to those of its parent Cantor Fitzgerald L.P (Cantor, rated 'BBB-/F3' by Fitch), as Fitch considers BGC as a core subsidiary of Cantor due to the significant operational and financial linkages between the two companies.

BGC's IDB business is facing significant pressure from persistently low trading volumes, low interest rates, broker-dealer deleveraging and regulatory uncertainties. However, the resulting lower financial brokerage revenues are being more than offset by the growth in its CRE brokerage business, resulting in stable operating performance compared to some its peers. BGC's year-over-year revenues were up 4% in 2013 (excluding gain on sale of businesses), and down 1% in first quarter 2014 (1Q'14), which compares favorably to industry and peer trends. CRE brokerage segment has grown to account for 34% of total revenues in 1Q'14. Fitch expects the contribution from this segment to further increase in light of continuing challenging conditions in the IDB business. Fitch views the CRE brokerage business as being highly cyclical with limited synergies/cost savings with BGC's IDB business, but recognizes the diversification benefits it provides to BGC's overall revenue stream.

EBITDA, adjusted for non-recurring gains and losses and the non-cash partnership enhancement compensation charge, for trailing 12 months (TTM) ended 1Q'14 declined 5% to $205 million, from $216million at year-end 2012, due to loss of contribution from the sale of high margin eSpeed business and increased compensation expense associated with the growth of the CRE brokerage platform. Fitch expects deployment of the eSpeed sale proceeds including, the recently announced acquisitions, along with volume growth in the CRE brokerage business to offset cost increases and improve overall margins. For instance, adjusted EBITDA in 1Q'14 increased 30% to $61 million compared to 1Q13, and adjusted EBITDA margin improved to 13.7% in 1Q'14, from 10.5% in 1Q13, despite the loss of eSpeed earnings.

BGC is carrying a significant amount of balance sheet liquidity, with reported cash position of $717 million at 1Q'14, primarily from proceeds received from the eSpeed sale. Fitch believes that the current high cash position is temporary, and BGC has publicly stated that excess cash will be primarily used for organic growth opportunities, acquisitions, debt paydowns and share buybacks. The company has already announced/closed some complementary acquisitions in both core businesses including: HEAT, a U.S. over-the-counter energy broker, Remate Lince, one of Mexico's leading IDB's known for its interest-rate derivatives and bond brokerage business, and Cornish & Carey, a northern California full-service commercial real estate firm. This should add further scale to both business segments. BGC has earmarked sufficient liquidity to pay down the principal and interest on $150 million of its convertible debt coming due in April 2015, which is an important ratings driver.

Leverage, as measured by adjusted EBITDA to gross debt, declined slightly to 2.1x at TTM ended 1Q'14, compared to 2.2x at year-end 2012, despite the drop in EBITDA level as the company paid down approximately $50m in collateralized debt. Leverage, pro forma for the $150 million in debt paydown, improves to 1.3x, all else equal. Interest coverage was 5.4x at TTM ended 1Q'14, but is expected to improve to 8.2x due to interest expense savings from the debt paydown. Both pro forma metrics are appropriate for the current ratings given the cyclical nature of the core businesses.

RATING SENSITIVITIES

The Stable Rating Outlook reflects the likelihood that BGC will continue to rationalize costs and improve overall margins, while keeping sufficient liquidity for near-term debt maturities. Ratings could come under pressure if cash levels materially decline before the April 2015 debt maturity. Other negative sensitivities include shareholder friendly activities, sale of other core businesses without appropriate reinvestment of proceeds, and failure to achieve/maintain scale in new businesses. Any changes in Cantor's ratings could also result in changes to BGC's ratings.

Positive rating momentum, although limited in the medium term, will be driven by successful deployment of eSpeed sale proceeds, sustained improvement in leverage, interest coverage and profitability metrics.

Additional information is available on www.fitchratings.com

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (January 2014);

--'Securities Firms Criteria' (January 2014);

--'2013 Outlook: Securities Firms (November 2013);

--'Inter-Dealer Brokers: Challenges and Opportunities from New Regulations (October 2013).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Securities Firms Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732556

2014 Outlook: U.S. Securities Firms (Capital and Liquidity Counterbalance Challenging Market Conditions)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722741

Inter-Dealer Brokers: Challenges and Opportunities from New Regulations

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719682

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836311

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Mohak Rao, CFA

Director

+1-212-908-0559

Fitch Ratings, Inc.

33 Whitehall St.

New York, NY 10004

or

Secondary Analyst

Tara Kriss

Senior Director

+1-212-908-0369

or

Committee Chairperson

Joo-Yung Lee

Managing Director

+1-212-908-0560

or

Media Relations

Brian Bertsch, New York, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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