The Math Behind Egan-Jones' Downgrade Of Knight To Triple Hooks
Moments ago, Egan Jones downgraded Knight Capital again, having downgraded the firm yesterday, from B- to CCC. The reason: the math just does not work out (pretty much as is the case with Europe, and the entire Welfare state developed world paradigm, but that's a different story). Full logic below.
Tough math - KCG probably needs $600M of equity capital but its market cap is only $300M and therefore probably can only raise $80M to $90M using normal rules of thumb. A sale of the firm would take 90 days under good conditions and therefore only an equity or quasi-equity investment makes sense. However, with weakness in the markets, there is likely to be few likely buyers. In a good year KCG earns $115M and therefore the $440M loss is debilitating. (Watch for the secondary losses related the loss of client confidence.) Net revs for the June quarter declined by 13% YoY. The Market-Making segment revenues were down 21% with pre-tax income down 84% from $39.2M to $5.9M due to trading losses related to the Facebook IPO. June quarter oper inc was down from $29.5M to $5.4M. We are downgrading