BGC PARTNERS
Fitch Ratings has affirmed
Fitch has also affirmed Cantor's senior unsecured debt rating at 'BBB-'. The Rating Outlook is Stable.
Today, Fitch has also taken a rating action on Cantor's publicly traded subsidiary
Fitch applies a common rating approach to Cantor and BGC, reflecting Cantor's meaningful ownership of BGC and its 58.5% voting control; the strong integration of the firms' management teams, operations and systems; and potential balance sheet fungibility.
Key Rating Drivers
The ratings affirmation reflects Cantor's established position in the middle-market investment banking and brokerage space; moderate risk profile, as reflected in its focus on brokering and financing high-quality government and agency securities; moderate business diversification in wholesale financial brokerage and real estate brokerage activities, provided through Cantor's consolidated subsidiaries
Cantor's ratings are constrained by the cyclical nature of its wholesale financial brokerage, capital markets and real estate activities, which have historically resulted in periods of volatile performance. The ratings are also constrained by the organizational complexity of the consolidated business platform along with the firm's periodic strategic evolution which Fitch views as opportunistic.
Fitch believes there is material key person risk associated with Cantor's CEO
Cantor's consolidated operating performance was relatively challenged in 2022 compared to 2021. For the year, the firm generated an operating profit to average equity below the 'bbb' category benchmark range of 5% to 10% for high balance sheet securities firms with an operating environment score in the 'aa' category. While fixed income revenue grew materially yoy, equities and investment banking revenues decreased from particularly strong levels seen during 2021. Meanwhile, results within Cantor's wholesale financial brokerage and real estate brokerage businesses normalized from 2021 when both benefitted from one-time gains.
Fitch estimates that Cantor's consolidated adjusted leverage (tangible assets less reverse repo and securities borrowed to tangible common equity [TCE], excluding non loss-absorbing noncontrolling interests) ratio was below Fitch's 'bbb' category benchmark range of 10.0x-15.0x for balance sheet-intensive securities firms as of
Still, Fitch believes the structural complexity of Cantor's consolidated platform, dual-class share ownership structure of publicly traded subsidiaries and allocation of capital to various legal entities could constrain capital transfers in a stressed scenario. This is partially offset by adequate capitalization of key regulated entities.
Fitch believes consolidated liquid assets, comprised of cash and equivalents and unencumbered marketable securities, remain sufficient relative to operating needs, particularly in the context of manageable debt maturities over the next two years. Cantor recently announced a leverage-neutral issuance of a yen-denominated bond that will refinance the
The 'F3' Short-Term IDR is derived from the mapping between the Long-Term and Short-Term IDRs outlined in Fitch's 'Non-Bank Financial Institutions Rating Criteria.' Per the rating criteria, a Long-Term IDR of 'BBB-' corresponds to a Short-Term IDR of 'F3'.
The Stable Rating Outlook reflects Fitch's expectation that Cantor's earnings performance, as measured by pre-tax income to average equity, will generally remain in the 5%-10% range and the firm will maintain a moderate risk profile, along with adjusted leverage at-or-below Fitch's 'bbb' category benchmark range of 10x-15x for balance sheet-intensive securities firms.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
An idiosyncratic liquidity event at Cantor;
An inability to cost-effectively address the
The maintenance of adjusted leverage above 15x for more than two quarters, on a TCE basis, or at the core brokerage business level, as defined above without a credible plan to reduce leverage in the near term;
A meaningful deterioration in the operating performance such that the firm's pre-tax ROE falls below 5% on a sustained basis;
Adverse changes in the reverse repo book composition; and/or
An abrupt departure of Cantor's CEO.
Cantor's and BGC's ratings also remain sensitive to substantial deterioration of Newmark's credit profile. While an adverse change in the ratings of Newmark (limited to one notch) may not automatically result in a downgrade of Cantor's ratings, Fitch believes the credit profiles of Cantor and Newmark remain closely aligned.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Reduced structural complexity on a consolidated basis;
The maintenance of a conservative leverage profile, as reflected in net adjusted leverage sustained below the lower end of the 10x-15x 'bbb' benchmark range, on a TCE basis, while maintaining cash flow leverage, as reflected in debt/EBITDA at BGC and Newmark at 2.0x or below;
A demonstrated track record of earnings stability over an extended period of time, such that core operating income to average equity is sustained at or above 10%; and
A strong liquidity profile with liquid assets to short-term funding ratio toward the mid-point of 100%-175% on a sustained basis.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The senior unsecured rating is equalized with Cantor's Long-Term IDR, reflecting the largely unsecured corporate funding profile and Fitch's expectation for average recovery prospects in a stressed scenario.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The senior unsecured debt ratings are sensitive to changes in Cantor's Long-Term IDR and would be expected to move in tandem. The Short-Term IDR is primarily sensitive to any change in Cantor's Long-Term IDR.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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