MF Global UK Limited (in special administration) Illustrative Financial Outcome 31 October 2012

Transcription

1 MF Global UK Limited (in special administration) Illustrative Financial Outcome 31 October 2012

2 Important notice This Document has been prepared by Richard Heis, Michael Pink and Richard Fleming, the joint special administrators of MFGUK (the Joint Administrators and the Company, respectively), solely to present to the creditors and clients of MFG UK Limited (in special administration) an update of the illustrative financial outcome of the estate. This Document has been prepared in good faith, however no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the Company, the Joint Administrators or any of their respective representatives or advisers in respect of the truth, accuracy or completeness of the information provided in this Document and such persons will not be liable to the recipients in respect of the information provided in this Document or its use. In particular, but without prejudice to the generality of the foregoing, no representation or warranty is given as to the achievement or reasonableness of any future projections, prospects or returns (including any estimated outcomes for clients, the unsecured creditors or shareholders) contained in this Document. Any estimated outcome for the clients, unsecured creditors or shareholders included in this Document (or commentary thereon) is illustrative only and cannot be relied upon as guidance as to the actual outcomes for the clients, unsecured creditors or shareholders. Any person, creditor or client that chooses to rely on this Document for any purpose or in any context other than those stated, does so at its own risk. Neither the Company, Joint Administrators, nor any of their respective representatives or advisers accepts any responsibility for any acts or omissions as a result of the information contained within this Document and all liability for damages arising from the information provided is expressly excluded. The Joint Administrators give no undertaking to provide the recipient with access to any additional information or to update this Document, or to correct any inaccuracies in it which may become apparent. This Document has not been prepared in contemplation of it being used, and is not suitable to be used, to inform any investment decision in relation to the debt of, or any financial interest in, the Company or other companies in the same group. Nothing in this Document constitutes a valuation or legal advice. Where legal issues are discussed, the information is only intended to be of a general nature and not a full review of the issues covered. Michael Pink and Richard Heis are authorised to act as insolvency practitioners by the Institute of Chartered Accountants in England and Wales. Richard Fleming is authorised to act as an insolvency practitioner by the Insolvency Practitioners Association. The Joint Administrators act at all times as agents for the Company. The appointments of the Joint Administrators are personal to them and, to the fullest extent permitted by law, KPMG LLP does not assume any responsibility and will not accept any liability to any person in respect of this Document or the conduct of the administration. 1

3 Glossary of terms 30.7 CFTC regulation 30.7 ATT Absolute title transfer Client Money Pool Segregated client monies CFTC House Estate JSAs MFGI MFG UK / the Company RTM SIPA Trustee US Commodities Futures Trading Commission Non-segregated creditor and estate assets Richard Heis, Michael Pink and Richard Fleming as Joint Special Administrators of MF Global UK Limited (in special administration) MF Global Inc. MF Global UK Limited (in special administration) Repo to maturity James W. Giddens as trustee of MFGI 2

4 Contents Page Summary of model & distributions 4 Summary of illustrative financial outcome combined estate Summary of illustrative financial outcome client money pool Summary of illustrative financial outcome general estate and interim distribution calculation

5 Summary of model & distributions

6 Illustrative Financial Outcome Summary of model and distributions Introduction and basis of preparation In this document the JSAs of MFG UK present a revised illustrative financial outcome range for clients and creditors of MFG UK. In addition to an update of the previous combined estimated outcomes, this document includes for the first time an illustrative split between the client and creditor estates. This should be read in conjunction with the illustrative financial outcome range published in June Summary of model The tables on the following pages provide a summary of the illustrative financial outcome. Based on current information, and subject to the various material cautions and caveats set out in this document, the illustrative range of financial outcomes suggests that available funds eventually could amount to between some $3.0 billion and some $3.2 billion and total client money and unsecured claims could fall between some $3.0 billion and some $3.6 billion. This represents a narrowing of the range of illustrative outcomes as previously reported by virtue of the JSAs continued progress in realising estate assets and agreeing liabilities with claimants. It should be noted that the illustrative range of financial outcomes presented includes a low (ie more prudent) case estimate and a high (i.e. less prudent) case. These should not be considered best and worst possible cases. As highlighted in the Special Administrators Progress Report for the 6 month period 31 October 2011 to 30 April 2012 (the 6 Month Report ), the JSAs commented that there are two particularly significant issues that are likely to have a defining impact on the timing and value of the eventual recovery that creditors will make: Resolution of matters involving the respective estates of MFGI, MF Global Finance USA Inc, MFG Holdings and MFG UK, the most significant of which relates to the treatment of losses on the RTM portfolio between MFG UK and MFGI. The difference between the SIPA Trustee s estimates of the amounts due to MFGI from MFGUK on the RTM trades and the amounts actually lost by MFG UK on those trades amounts to circa $350million; and Continued efforts to facilitate the recovery of House assets, the majority of which are held at a small number of financial institutions. As stated above the JSAs have also sought to break down the illustrative financial outcome into separate parts representing the general estate and the client money pool respectively. The component parts need to be considered in the context of considerable legal uncertainties that could impact the ultimate outcomes for individual creditors and clients, which inevitably have led to the high/low range estimate being quite wide. These include: The impact of the Lehman Supreme Court Ruling which has created uncertainty as to what money is to be treated as being part of the client money pool and the general estate; Uncertainty over the value of an individual client s claim (which is currently being considered via the Hindsight court proceedings) and a potential consequential uncertainty over the treatment of shortfall claims from the client money pool into the general estate; and Uncertainty as to the effect of transfers of open positions post-administration (i.e. In the circumstance where such a transfer resulted in value/margin leaving the estate, whether this should be considered a distribution) The JSAs have also provided an outline of the key factors impacting the timing and quantum of subsequent distributions from the client money pool and an interim dividend from the general estate. At present, it is not possible for the JSAs to declare a dividend on the general estate, as a result of the various trust claims that have been made into the MFGUK estate. The JSAs are currently reviewing the timing and quantum of any subsequent distributions out of the Client Money pool. 5

7 Summary of illustrative financial outcome

8 Illustrative Financial Outcome Summary of illustrative financial outcome combined estate The summary table below should be read in conjunction with the underlying assumptions and the narrative detailed on the following page. Illustrative financial outcome (including comparison to that previously reported) Previously stated As at 15 June 2012 As at 30 September 2012 Assumptions / Narrative Low ($m) High ($m) Low ($m) High ($m) (see page 8) Combined house and client estate Amount currently under the control of the 1,979 1,979 2,315 2,315 1 administrators Projected future recoveries Affiliates Third party receivables Total future projected recoveries 1,034 1, ,063 Priority claimants / costs of the 4 administration Contingency for costs (200) (150) (153) (103) 5 Specific contingency (60) (60) (60) (60) Total priority claims (260) (210) (213) (163) 7 Funds available for creditors and clients 2,753 3,223 3,057 3,216 Creditor and client liabilities Creditor and client liabilities (3,855) (3,005) (3,664) (3,015) 8 Total creditor and client claims (3,855) (3,005) (3,664) (3,015) Illustrative financial outcome (shortfall)/surplus to creditors and clients (1,102) 218 (607) 201 Note: 1. This illustrative financial outcome is for illustrative purposes only and is based on the information available to the JSAs at the time of disclosure. No reliance should be placed on the values contained within the summary or the illustrative financial outcome to creditors. 2. To the extent surplus is available in the estate after payment of all creditors, this may go toward statutory interest on the unsecured debt or towards any subordinated debt. The JSAs have chosen not to include these costs at this stage and express no view on what entitlement any party would have to the money. 7

9 Illustrative Financial Outcome Detailed assumptions and narrative Detailed assumptions and narrative 1. Based on the JSA s receipts and payments records. For the purposes of the presentation of this illustrative financial outcome, the JSAs have added back the $170 million that has been paid to date as part of the interim client money distribution. Cash under the control of the JSAs has increased significantly since the last illustrative financial outcome presented in June 2012 based on the success of the JSA s efforts to recover assets from financial institutions. 2. Projected future recoveries from affiliates includes amounts due from MFGI ($409 million) and assumes MFGUK will receive a 100% dividend from each affiliate estate. 3. Third party receivables include debtor balances due from customers as well as amounts owed by counter-parties. There is a risk that these balances may not be received in full. The key swing factor between the low and high case are the recovery of withholding tax reclaims and cash from overseas exchanges. 4. The scenarios presented assume that the JSAs are successful in the 30.7 application and that no priority payments arise as a result (see page 11 for an illustration of the impact if not successful). 5. The estimate of future payments of running the administration, including salaries, establishment costs, IT costs etc. Costs to date have already been accounted for within cash under the control of the administrators which is net of costs paid to date. 6. The JSAs have not reflected the $236 million claim submitted by MF Global Finance USA Inc. as a priority payment as this is considered somewhat duplicative of a claim made by the SIPA Trustee of MFGI and appears to be without merit (see page 11 for the impact if a trust claim succeeds). 7. The key reasons for the range are: The existence of claims from third parties that the JSAs consider most likely to be duplicative, overstated and / or spurious. The JSAs are currently working through all creditor claims in order to agree balances. The JSAs have made continued progress in reconciling and agreeing customer claims, which is the main reason for the decrease in the range of creditor balances. Differences in the estimate of losses incurred respectively by MFG UK / MFGI in relation to the liquidation of the RTM portfolio. 8. This illustrative financial outcome excludes amounts owed to MFG Finance Europe Limited in relation to a $250m subordinated debt held by that entity. 8

10 Illustrative Financial Outcome Summary of illustrative financial outcome client money pool The summary table below should be read in conjunction with the underlying assumptions and the narrative detailed on the following page. Illustrative financial outcome As at 30 September 2012 Low ($m) High ($m) Assumptions / Narrative (see page 10) Client estate Amount currently under the control of the administrators Projected future recoveries Affiliates Third party receivables 0 0 Total future projected recoveries Priority claimants / costs of the administration Contingency for costs (100) (83) 3 Total costs of the administration (100) (83) Funds available for clients Creditor and client liabilities Client liabilities according to the MFGUK books and records (1,066) (1,066) Clients that ought to have been segregated (20) (20) 4 Disputed claims third parties (631) Disputed claims MFG Inc (815) 5 Total client claims (2,532) (1,086) Illustrative financial outcome to clients before any recovery of shortfall from general estate (1,585) (122) 6 Note: 1. This illustrative financial outcome is for illustrative purposes only and is based on the information available to the JSAs at the time of disclosure. No reliance should be placed on the values contained within the summary or the illustrative financial outcome to creditors. 9

11 Illustrative Financial Outcome Detailed assumptions and narrative Detailed assumptions and narrative 1. Based on the JSA s receipts and payments records. For the purposes of the presentation of this illustrative financial outcome, the JSAs have added back the $170 million that has been paid to date as part of the interim client money distribution. 2. Assumes that no proceeds associated with clients that ought to have been segregated can be allocated to the client money pool. 3. To date the costs have been paid out of the realisations within the general estate, but in contemplation of recovering a proportion of the costs from the client money and client assets. The estimate of the costs attributable to the client money pool is an assumption that one third of the total forecast costs for the administration will be attributed to the client money pool (based on an approximate pro-rata split of total liabilities between the client and creditor estate). At this stage this is purely for illustration purposes and an exercise will be carried out to determine an appropriate split once the total population of entitlements to the client money pool is known. 4. To date the JSAs have reached an agreement over account classifications with almost 50% of the 1,300 claimants that have asserted that they ought to have been afforded client money protection. It has so far been determined that clients with claims totalling $20m ought to have been treated as segregated and, hence, are entitled to share in the client money pool. There are still $631m of disputed claims to be resolved and these have been reserved for in the low case scenario 5. The JSA s dispute that $815m of the claims made by MFG Inc into the client money pool are valid claims against the client money pool. The JSAs have however provided for these claims in the low case. 6. The ultimate return for an individual client will be dependent on a number of factors including the treatment of the shortfall claim in the event that there are insufficient funds in the CMP to pay all agreed client claims in full, the effect of transfers and the outcome of the Hindsight Court Hearing (which could also impact the treatment and value of any shortfall claim). 10

12 Illustrative Financial Outcome Summary of illustrative financial outcome general estate The summary table below should be read in conjunction with the underlying assumptions and the narrative detailed on the following page. Illustrative financial outcome As at 30 September 2012 Low ($m) High ($m) Assumptions / Narrative (see page12) House estate Amount currently under the control of the administrators 1,397 1,397 Projected future recoveries Affiliates Third party receivables Total future projected recoveries Priority claimants / costs of the administration Contingency for costs (153) (103) 1 Costs allocated to CMP Specific contingency (60) (60) Total priority claims (113) (80) Funds available for creditors 2,110 2,252 Creditor and client liabilities Creditor and client liabilities as per the MFGUK books (2,598) (1,948) Less: Ought to have been segregated Shortfall from client money pool (1,586) (122) 3 Total creditor and client claims (4,164) (2,051) Illustrative financial outcome to creditors (2,054) Interim distribution calculation General estate As at 30 September 2012 $m Amount currently under the control of the administrators 1,397 Provision for future costs (53) Provision for specific contingency (60) Total potential cash available for distribution 1,284 Required reserves (trust type claims) Reserve for MFG Finance USA claim (236) Reserve for MFG Inc 30.7 claim (429) Reserve for assets that could be potentially traced relating to (651) disputed claims Total required reserves (1,316) Funds available for distribution to creditors (32) Note: 1. This illustrative financial outcome is for illustrative purposes only and is based on the information available to the JSAs at the time of disclosure. No reliance should be placed on the values contained within the summary or the illustrative financial outcome to creditors. 2. The Trustee of MFG Holdings Finance USA has submitted a claim for at least $236m Note: 1. This illustrative financial outcome is for illustrative purposes only and is based on the information available to the JSAs at the time of disclosure. No reliance should be placed on the values contained within the summary or the illustrative financial outcome to creditors. 2. To the extent surplus is available in the estate after payment of all creditors, this may go toward statutory interest on the unsecured debt or the payment of any subordinated debt. The JSAs have chosen not to include these costs at this stage and express no view on what entitlement any party would have to the money. 3. Balances have been presented above in USD for ease of aggregation of the overall estate position. In reality all foreign currency liabilities are translated into GBP at the time of appointment of the JSAs. 11

13 Illustrative Financial Outcome Detailed assumptions and narrative Detailed assumptions and narrative 1. To date all costs have been paid out of realisations in the general estate. A significant proportion of these costs will be recovered by reimbursement from the client money pool and client asset claimants. As a result, the future costs to be allocated to the general estate are considerably lower than those to be incurred by the client money pool. 2. No assumption has been made on asset tracing in either scenario. 3. The low case estimate for the general estate assumes the maximum shortfall on the client money pool and vice versa. 4. The ultimate return for an individual creditor will be dependent on a number of factors including the treatment of the shortfall claim and the effect of transfers. Distributions The timing and quantum of distributions to unsecured creditors and further distributions to client money claimants is impacted by the following: 1. The Supreme Court ruled in Lehman Brothers International Europe v CRC Credit Fund Limited & Others that client money pooling arrangements apply to client money in house accounts as well as in segregated accounts. This has created uncertainty as to what money is to be treated as being part of the client money pool and, therefore, as to the value of assets that constitute the unsecured estate. 2. In addition, the same ruling held that participation in the client money pool is not dependent on the segregation of client money. This has created uncertainty as to which claimants are entitled to participate in the client money pool and, therefore, which claims fall to be paid from the general estate. This impacts the value of claims against the estate that we would need to consider in calculating the interim distribution. There are a number of legal principles to establish in relation to determining the segregated status of certain claimants. Court direction may be required before we can finalise this issue. To be prudent we have made a reserve on the assumption that all disputed claims could potentially result in the related assets being traced and therefore would not be available to distribute to the general estate. 3. The trustee of MF Global Finance USA Inc. has particularised a claim for an amount of $236m (approximately 147m), which the JSAs have rejected. The trustee has appealed our decision to reject the claim. As a result of the appeal we are now required to obtain the court's permission if we are to proceed with making a distribution and must provide for the claim. 4. The proceeds from the liquidation of the T-bills are reserved in the event that MFGI are successful in the 30.7 application and this is treated as a client asset claim. This is estimated at $429m. However, please note that there may be competing claims against the proceeds which therefore may not flow directly to the SIPA Trustee. 5. In light of the tracing issues together with the trust claims from MF Global Finance USA Inc/Holdings, the JSA s analysis indicates that there are no funds available in the general estate to distribute and as such the dividend will therefore continue to be postponed. 12

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