It took just eight days for Refco Inc. to go from up-and-comer to down-and-out, with a midnight bankruptcy announcement capping off the commodities broker’s stunning collapse.
The new owner of its commodities trading subsidiary, however, believes the company now has a chance to right itself and return to its former glory as the nation’s largest independent commodities trader.
A consortium of private buyout firms, led by J.C. Flowers & Co. LLP, tentatively agreed late Monday to purchase Refco’s commodities trading subsidiary for $768 million, salvaging one of the few solvent divisions in the company. Refco and 23 of its subsidiaries then filed for Chapter 11 protection in U.S. Bankruptcy Court in Manhattan.
The head of the consortium, J.C. Flowers Chairman Christopher Flowers, said he hopes to rescue all of Refco, which tumbled ignominiously into bankruptcy after the company revealed Oct. 10 that former Chief Executive Phillip Bennett hid $430 million in bad debt from regulators and shareholders.
“Part of Refco’s appeal is its independence,” Flowers said in an interview with The Associated Press. “It’s too early to predict what the future might hold, but the ideal would be for Refco to continue as an independent company and restored to what it was.”
Refco shareholders are likely less sanguine. After being de-listed Tuesday from the New York Stock Exchange, shares of Refco were trading at just 65 cents each on the “Pink Sheets” electronic bulletin board — a 98 percent tumble from its closing price on Oct. 7, the last trading day before the accounting scandal came to light.
Since then, Bennett has been arrested on federal securities fraud charges, and customers abandoned Refco in droves, precipitating a cash crunch that led to the bankruptcy filing. Customer assets in Refco’s unregulated offshore broker/dealer remain frozen until next week, and Refco Securities LLC, a regulated brokerage, continued to liquidate its holdings to free up cash. On Tuesday, credit rating service Standard & Poor’s lowered Refco’s bond ratings to “D” — meaning that the bonds are in payment default.
Now it’s up to Flowers, a former Goldman Sachs Group Inc. managing director, and new Refco Chairman Mark Winkelman, another Goldman alumnus, to attempt a turnaround at the nation’s largest independent commodities trader even as competitors try to steal more of its customers.
“We’d like to restore confidence among customers and employees. We think Refco’s global futures business is a safe place for customers, a good place to do business,” Flowers told the AP. “And while we’ve lost some customers, we still have a large majority which have stuck with Refco.”
The Flowers-led consortium includes The Enstar Group, Inc., Silver Point Capital, MatlinPatterson Global Advisers LLC, and Texas Pacific Group. Refco said it expects definitive agreements to be reached soon. Silver Point, MatlinPatterson and Texas Pacific did not return calls for comment.
Enstar Group Chairman Nimrod Frazer told the AP Flowers hopes to revive the company rather than sell off pieces of the business. Flowers sits on Enstar’s board, and engineered that company’s turn around as well.
“He’s got some substantial management people who know this business with him,” said Frazer, whose company plans to invest $25 million in the potential Refco takeover. “This isn’t some jury-rig deal. I think these people are fortunate to have a man like him to help them.”
Flowers said the Flowers-led group would work to retain employees as much as possible, though lower customer volume and bankruptcy would result in some lost jobs.
“We hope for Refco to continue to be a substantial, robust and prosperous business for a large group of employees,” Flowers said, “though unfortunately, not for every single one.”
Shareholders, however, could be left to pick over the remains of Refco, which was worth $3.46 billion in shareholder value on Oct 7. Flowers’ group paid the $768 million to Refco Inc., which then entered into bankruptcy protection. It will be up to the bankruptcy courts to determine how much shareholders might get.
In its bankruptcy filing, Refco listed assets of $48.8 billion and liabilities of $48.6 billion. Just two months ago, Refco had listed assets of $74.4 billion, according to the prospectus filed with the Securities and Exchange Commission for the company’s initial stock offering.
The bankruptcy filing also said the company has more than 1,000 creditors. The biggest is the Austrian bank that lent Bennett the money to cover the alleged accounting discrepancies. Bank Fuer Arbeit und Wirschaft AG, or Bawag, said Tuesday it would be prepared to take a loss on the loan if need be. The bank said it lent Bennett 350 million euros ($418.4 million) and another 75 million euros ($89.7 million) directly to Refco to cover unnamed “liabilities.”
The loan was secured by Bennett’s 34 percent stake in Refco stock. Bawag said it still considers the collateral valid, but would be prepared to “cover any potential risks.” Nonetheless, Austria’s Vice Chancellor Hubert Gorbach called for an investigation of the loan.
Other major creditors include Wells Fargo & Co.’s Corporate Trust Services, VR Global Partners LP, Rogers Raw Materials Fund and Bancafe International Bank Ltd.
CBOT Holdings Inc., the company that runs the Chicago Board of Trade and plans an IPO of its own, said Refco’s troubles shouldn’t hurt its revenue. In a regulatory filing, CBOT said about $4 million in outstanding accounts are associated with Refco, one of CBOT’s top customers.
All through the crisis, the top commodities exchanges — CBOT, the New York Board of Trade, the New York Mercantile Exchange and the Chicago Mercantile Exchange — stressed that Refco remained in good standing, assuaging fears that a collapse would threaten the integrity of the nation’s marketplaces for trading oil, metals and other commodities.