Fitch Ratings is bearish on the outlook for KCG Holdings.
In 2013, Fitch maintains the merger between Knight Capital Group and Getco Holding Company–the new company will be called KCG Holdings–will face earnings pressure due to depressed trading volumes, a weak economy, high merger-related expenses, regulatory changes, technology upgrades, and legal fees for lawsuits.
In Fitch’s view, first reported by Reuters, “the transaction has meaningful execution risks including increased initial leverage levels and near-term liquidity risks, which set against the backdrop of depressed trading volumes and regulatory scrutiny, combine to result in a highly speculative credit profile at this time.”
To fund the $1.3 billion merger, KCG will issue a $535 million senior secured first lien credit facility.
Reuters reported that both Knight and Getco each reported poor financial results in the first quarter, following weak performances last year. Lower trading volumes and volatility are behind the bad results. In the case of Knight, according to Reuters, the problems include charges related to its August 2012 technology glitch as well as goodwill and intangibles write-offs.
The good news is that KCG has announced that it is looking to sell off Urban Financial Group, a reverse mortgage lender. In Fitch’s view, Reuters reports, this could provide additional capital to KCG, which otherwise is restricted for Urban’s operations.
The Knight-Getco deal closes July 1.
