It was only in the days and hours leading up to the bankruptcy filing by MF Global (MF) that the trading firm’s woes began to dominate the financial news. For many investors, the first clues that the company was in jeopardy came merely a week before the bankruptcy, when credit rating agencies finally cut their ratings on MF Global’s debt. Sadly, for most investors, a warning that arrives that late doesn’t help them to avoid or limit their losses.
Looking back at MF Global in the months leading up to its bankruptcy filing at the end of October, however, we found other signals provided much more timely and actionable information. In particular, the StarMine Structural Implied Rating for MF Global started dropping several months before the company filed for bankruptcy protection, giving financial market participants a much more timely indication of the trouble to come.
The chart below, taken from Eikon CreditViews application, shows a one-year history of the credit agency’s ratings, StarMine Implied Rating and the StarMine Structural Model Global Rank. The StarMine Implied Rating is a mapping of the probability of default to an equivalent credit agency rating. The Global Rank is a 1-100 percentile rank of a company’s 1-year default probability based on the Structural Component of the StarMine Credit Risk Model. The higher a company scores, the less likely it is default on their debt obligations or file for bankruptcy within the coming 12 months. What is noteworthy is that this chart clearly shows that significant downgrades on the StarMine Implied Rating and Global Rank began in early August 2011, even as the three major credit rating agencies left their own ratings unchanged at higher levels.
As of October 20th the median StarMine Structural Credit Risk default probability for the Russell 3000 index was only 0.1%. But the probability of a default by MF Global was much higher; MF was ranked 12th with a default probability of 9.7%. Looking at the financials page for MF, the cause was obvious: the company’s leverage had reached nosebleed levels of roughly 30-to-1. With such a high degree of leverage, it’s not very surprising that a bad trade was enough to tip MF Global into bankruptcy
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