Corzine covenant smacks more of PR than protection

August 3, 2011

By Antony Currie and Agnes T. Crane
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)

NEW YORK — Jon Corzine makes no secret of the fact that politics is his passion. Now buyers of debt in MF Global, the firm he runs, are set to get a boost if the former Democratic politico and Goldman Sachs CEO should leave the broker-dealer to decamp to Washington. They’ll get an extra one percentage point of interest on the firm’s $300 million bond deal. That might sound encouraging. After all, bondholder activism is a good thing. But this key-man clause seems to benefit Corzine’s image more than creditors.

Sure, Corzine abandoning his new post would be a setback for the firm. His name has lent credence to the drive to turn MF Global — a business spun off from the scandal-hit Refco — into a broader trading and even investment bank. His predecessor, Bernie Dan, was, like the firm itself, a dyed-in-the-wool futures specialist.

So shareholders would be distressed to see Corzine depart. But it would not constitute a major credit event. There might be some wobbles: a few senior bankers could leave, earnings might fall for a quarter or two. But it’s hard to see how one executive’s departure for another, non-competitive job would undermine a firm’s creditworthiness.

But let’s assume it did. In that unlikely scenario, bondholders would share among them an extra $3 million a year. That hardly constitutes adequate recompense for increased risk. What’s more, if lenders really are concerned about the consequences of Corzine leaving, they should be insisting on a clause in the debt deal that covers every eventuality, not just the possibility that President Barack Obama might ask him to run the Treasury department, which is what the deal document essentially implies.

Corzine’s links to both Goldman and the troubled finances of New Jersey, where he was most latterly governor, make his Senate confirmation for such a job enormously tough. The Corzine covenant is at least good PR for MF Global and its boss. But as protection for bondholders, it’s pretty much meaningless.

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