Knight Needs More Than Loan Armor (Update 2)
Updated with comments from Fitch Ratings, CRT Capital Group analyst Keven Starke, and market close informatoin.
NEW YORK (TheStreet) -- Knight Capital Group
The shares shot up 57% to close at $4.05, amid a very strong market rally on surprisingly strong job growth numbers, after the Wall Street Journal reported that Knight Capital had told its clients that the company had obtained a new credit line, allowing it to continue processing trades for its customers for another day.
Shares of the Jersey City, N.J., market maker and facilitator of electronic transactions for wholesale trading clients announced dropped 63% on Thursday, after Knight Capital announced a pretax loss of $440 million, after glitches in its trading software on Wednesday "sent into the market a ton of orders, all erroneous, so we ended up with a large error position which we had to sort through the balance of the day," according to Knight Capital CEO Thomas Joyce, who was interviewed on Bloomberg TV.
Knight Capital announced early Thursday that it was "actively pursuing its strategic and financing alternatives to strengthen its capital base."
KBW analyst Niamh Alexander had said on Thursday that "the Board needs to sell this company ASAP in our opinion if it can't get private financing to shore up capital," because "continuing independently will be challenging without more capital."
Potential acquirers for Knight Capital, according to Alexander, include Goldman Sachs
While investors were clearly breathing a sigh of relief -- pushing Knight Capital's shares well above the takeout value of $3.40 estimated by Stifel Nicolaus analyst Matthew Heinz on Thursday -- other Wall Street firms were shying away, with the Journal reporting that TD Ameritrade
Knight Capital in June renewed a $200 million credit line with a group of banks led by U.S. Bancorp
Included among the covenants of the credit agreement was a requirement that Knight maintain certain levels of capital for its broker-dealer subsidiaries, which the company might be unable to meet, following the three-day settlement of its erroneous trades, without securing additional capital from outside.
Alexander says "it's possible that they could be in breach," of the $200 million credit facility's covenants, "but they may not have actually drawn down those facilities."
Alexander calls the new credit line reported by the Journal "very encouraging," but says the company still needs "to do something and do it very quickly. It will be difficult for customers to continue to route
"It is going to be day by day... something needs to happen for people to feel better about the capital," she says.
Fitch Ratings on Friday said that "exposure to KCG, among large rated counterparties, is moderate and manageable," and that although "numerous institutions that relied on KCG for part of their trading requirements have already directed business to other market makers... it does not appear that any prime brokers had disproportionately high exposure" to the firm.
Fitch said that "even in a bankruptcy scenario, we do not expect any major rated institutions to suffer large losses linked to KCG's difficulties," although Knight Capital's software problems this week "may ultimately lead to a structural change in the equity market-making business."
CRT Capital Group analyst Kevin Starke said on Friday that Knight Capital's trading loss is likely to be recognized on Monday, and that "solving the liquidity problem and capital shortfall that this will cause thus needs to be completed by Monday." Starke also said that "FINRA is on site and stated publicly Thursday that the Company was in compliance with capital requirements, but we wonder aloud whether that is simply because the bad trades have yet to settle."
Starke also said "it is possible though not likely that the capital shortfall can be remedied with internal resources. To solve the liquidity problem,
-- Written by Philip van Doorn in Jupiter, Fla.
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