--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
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
BGC is carrying a significant amount of balance sheet liquidity, with reported cash position of
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
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
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
--'Global Financial Institutions Rating Criteria' (
--'Securities Firms Criteria' (
--'2013 Outlook: Securities Firms (
--'Inter-Dealer Brokers: Challenges and Opportunities from New Regulations (
Global Financial Institutions Rating Criteria
Securities Firms Criteria
2014 Outlook: U.S. Securities Firms (Capital and Liquidity Counterbalance Challenging Market Conditions)
Inter-Dealer Brokers: Challenges and Opportunities from New Regulations
Mohak Rao, CFA
Source: Fitch Ratings
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