S&P Lowers CME Group's ICR - Analyst Blog
February 13 2012 - 11:38AM
Zacks
Last week, ratings agency Standard & Poor’s Ratings Services
(S&P) downgraded the long-term issuer credit rating (ICR) of
CME Group Inc. (CME) to “AA-” from “AA”.
Additionally, S&P gave a “Negative” outlook to the rating,
thereby indicating the possibility of a further downgrade in the
near future.
The move came on the back of S&P’s concern over the $100
million fund announced by CME to protect the interest of farmers
and ranchers affected by the crash of MF Global. Under the Family
Farmer and Rancher Protection Fund, expected to be in effect by
March 1, 2012, farmers and ranchers using CME Group products will
be eligible for up to $25,000 per account in case of losses
resulting from the future insolvency of a clearing member or other
market participant.
Last year, the exchange had also announced a guarantee of $250
million to the estate trustees of MF Global, following the collapse
of the commodities firm, in order to make the process of returning
customers’ funds more rapid.
CME, as the regulator of MF Global, announced the guarantees to
protect consumers’ interest as well as boost its sagging trading
volume subsequent to the company’s collapse. Nevertheless, S&P
views the move unfavorably.
While the ratings agency concedes the financial risk posed by
the guarantees is minimal and can be covered by CME from its free
operating cash flow within six months, it believes that the move
will raise customers’ expectations regarding future guarantees.
S&P is also apprehensive about CME’s increasing exposure to
credit default swaps, as the exchange has limited experience in
managing the product. The ratings agency opines that some of the
counterparty risk of the off-exchange businesses gets transferred
to the clearing house. Nevertheless, CME’s ICR is still strong,
with only 21 companies in the S&P 500 having equivalent or
better ratings.
CME’s main competitors are CBOE Holdings, Inc.
(CBOE) and Nasdaq OMX Group Inc. (NDAQ). The
shares of CME carry a Zacks #3 Rank, which translates into a
short-term ‘Hold’ rating. However, considering the fundamentals, we
maintain our long-term ‘Neutral’ recommendation on the stock.
CBOE HOLDINGS (CBOE): Free Stock Analysis Report
CME GROUP INC (CME): Free Stock Analysis Report
NASDAQ OMX GRP (NDAQ): Free Stock Analysis Report
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