Fitch Affirms GFI Group Inc. at 'BBB'; Outlook Stable

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NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed GFI Group Inc's (GFI) long-term and short-term Issuer Default Ratings (IDR) at 'BBB' and 'F2', respectively. The Rating Outlook is Stable. A complete list of ratings is detailed at the end of this release.

The ratings affirmation reflects GFI's solid franchise as a top-tier inter-dealer broker (IDB), low credit and market risk profiles, robust risk management, and modest liquidity and funding needs. Rating constraints include high operational risks inherent in the IDB business, limited diversity and cyclicality in revenues, lagging operating margins, and the heightened legislative and regulatory scrutiny of the global over-the-counter (OTC) derivatives markets.

Operating performance can be volatile, as revenues from individual products tend to be cyclical and may not perform well under certain market conditions. GFI has been active in making small bolt-on acquisitions to add to its existing roster of electronic brokering, pre-and post-trading and clearing capabilities, in expectation of the impending regulatory changes. One of the most significant acquisitions was Kyte Group (Kyte) in July 2010. Kyte has expertise in listed derivative markets, effective risk management platforms and a unique clearing and brokering business model.

Total revenues for the first quarter of 2011 (1Q11) were $262.9 million, up 19% from the prior year quarter (1Q10) and up 18% from the sequential quarter (4Q10), primarily due to the addition of Kyte and a more favorable trading environment in emerging markets. Net income for the 1Q11 was $6.7 million, down from $13.4 million in 1Q10, but up from $4.3 million in 4Q10. The year-over-year decline was mainly due to increases in compensation and travel expense due to higher broker headcount, and increases in non-recurring and non-cash (depreciation and amortization) expenses related to acquisitions made in 2010.

Funding requirements are low. GFI issues debt primarily to fund acquisitions. Leverage has increased year-over-year, as the company made three acquisitions in 2010, with the largest being that of Kyte Group. Leverage, as measured by debt to EBITDA, adjusted for non-cash compensation (restricted stock unit amortization) and one-time expenses, was 1.8 times (x) and 1.4x at year-end 2010 and 2009, respectively and is inline with similarly rated peers. Fitch expects management to continue to remain prudent in its use of debt; any meaningful increases in leverage could result in a negative rating action.

GFI generated $96.1 million and $113.8 million in positive cash flow from operations for year-end 2010 and 2009, respectively. Cash, net of restrictions for regulatory purposes, totaled $136.9 million at the end of 1Q11. The company's next debt maturity is not until January 2013, when the $60 million senior secured notes come due. Fitch believes that between internal cash flow generation and unrestricted cash balance, GFI has sufficient liquidity to meet near-term liquidity needs.

The Stable Outlook reflects Fitch expectations for consistent operating profitability, adequate capital levels, and solid debt and interest coverage metrics. Material weakness in operating profitability or cash flows, a business model adversely impacted by regulatory changes, and/or a notable increase in leverage, could result in negative rating actions.

As one of the five tier-one interdealer brokers (IDB), GFI is a leading provider of wholesale brokerage, electronic execution and trading support products for global financial markets. GFI offers brokerage services in four broad product categories: fixed income, financial, equity, and commodity instruments to over 2,600 institutional customers. The IDB business model is based on trading volume which requires massive scale and breadth across various trading platforms. Since its inception in 1987, GFI has grown through both global acquisitions and enhancement of its existing electronic trading capabilities.

Fitch has affirmed the following ratings with a Stable Outlook:

GFI Group Inc.

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

--Short-term IDR 'F2'

Fitch has also withdrawn the 'BBB(EXP)' unsecured debt rating assigned to GFI on August 16, 2010, as the debt was never issued.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Criteria' (Aug. 16, 2010);

--'Rating Criteria for Securities Firms' (Dec. 30, 2009);

--'Short-Term Ratings Criteria for Corporate Finance' (Nov, 2, 2010).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685

Rating Criteria For Securities Firms - Financial Institutions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493276

Short-Term Ratings Criteria for Corporate Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726

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CONTACT:

Fitch Ratings
Brian Bertsch, +1-212-908-0549
Media Relations, New York
brian.bertsch@fitchratings.com
or
Primary Analyst:
Mohak Rao, +1-212-908-0559
CFA Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Leslie S. Bright, +1-212-908-0622
Senior Director
or
Committee Chairperson:
Ed Thompson, +1-212-908-0364
Senior Director