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MF Global’s $300m bond offering stirs controversy with Corzine clause

Wednesday, August 03, 2011

Jon S. Corzine
Opalesque Industry Update – MF Global Holdings Ltd., a broker-dealer providing trading and hedging solutions, yesterday announced a $300m underwritten public offering of senior unsecured debt (senior notes) subject to market conditions and other factors.

MF Global added it would use a portion of the net proceeds of the offering to repay part of its outstanding indebtedness under its $1.2bn revolving credit facility and for general corporate purposes.

Nothing unusual about that. But what is stirring controversy in Wall Street is the "Key Man Event" clause in the bonds’ prospectus. Reports indicate that MF Global is promising additional compensation for investors who buy the company’s bonds with an interest-rate bump if its Chairman and CEO Jon Corzine accepts a job in Washington as part of President Barack Obama’s team. The Wall Street Journal termed the clause as “the Corzine premium.”

The premium stipulates a one-percentage-point extra atop the $300m bond offering, or up to $15m, should Corzine decide to leave MF Global and accept a federal position and should his appointment be confirmed by the U.S. Senate before July 1, 2013.

According to the Wall Street Journal’s report, the 64-year-old former governor of New Jersey ran Goldman Sachs Group Inc. from 1994 to 1990 and was a senator from 2001 to 2006. Corzine joined MF Global in 2010 and was responsible for taking risk with the company’s assets with the aim of re-establishing the firm as a mid-sized investment bank. He also changed MF Global’s capital structure to reduce borrowing costs. Under his helm, MF Global’s shares rose 9.5% compared to the Standard & Poor’s 500 Financials Index which fell 4.9%.

A staunch Democrat, he is also one of the biggest contributors to Obama’s 2012 re-election bid.

Unusual clause
Several hedge fund managers and industry insiders seem surprised with the “key man” clause.

However, the Wall Street Journal claims that it is not unusual at all for companies to provide “key man” as an insurance if a senior executive or a key official becomes incapacitated, dies or transfers to another firm. The report explained that many investment firms, as well as private equity companies, provide a clause preventing investment decisions if major portfolio managers leave at once.

But industry players say this provision are rarely enforced because the clause is often binded to another clause that says it can only be used if multiple managers depart at once.

Marketing gimmick
There are also those, according to Reuters, who say the provision was more a reflection of MF Global's savvy financing tactics than an indication that President Barack Obama is considering Corzine for a job.

Kenneth C. Froewiss, a finance professor at New York University's Stern School of Business, told Reuters: "I doubt that it's likely to happen. Probably more a case of investor wariness."
Komfie Manalo


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