Fitch Assigns Initial 'BBB' L-T IDR to BGC Partners; Outlook Stable

Positive ratings drivers include: limited credit and market risks, modest liquidity needs and proven funding flexibility. Low capital levels and low earnings retention are key constraints. Also, given the significant interrelationship and/or commonality of businesses, clients, funding and management infrastructure, ratings of BGCP and its parent are fundamentally linked. On Oct. 14, 2009, Fitch assigned long-term and short-term IDRs of 'BBB' and 'F2,' respectively, to BGCP's parent Cantor Fitzgerald, LP (Cantor).

The Stable Outlook reflects Fitch's expectations that BGCP's low-risk businesses remain the primary revenue generators, profitability is sustained, risk appetite is controlled, and capital levels are sufficiently maintained.

In its primary role as intermediary, BGCP takes limited balance sheet risk. As principal, it matches buyers and sellers with little if any gap between the two sides in delivery-versus-payment settlement. And in 'give-up' transactions, the company merely arranges the trade between third parties; the negotiated terms are then executed directly between the buyer and seller. The company provides a variety of fixed income and equity products in this 'sales and distribution' model, including agencies, treasuries, MBS, corporate debt, global equities, and derivatives.

Cantor was founded in 1945 by Bernie Cantor. Initially a fixed income broker, equities trading was introduced in the 1960s. eSpeed was launched and spun-off in 1999. The BGC Division was created in 2004, when the wholesale voice brokerage was separated from the core institutional segment. With the merger of BGC and eSpeed in April 2008, BGC Partners, Inc. was created.

Serving the 'wholesale' market, inter-dealer broker BGCP provides voice, hybrid and fully electronic brokerage services to many of the world's largest financial institutions. BGCP offers brokerage services in four broad product categories: rates, credit, foreign exchange and other asset classes. As of year-to-date Sept. 30, 2009, rate products (which focus on government debt, futures and currency and interest rate derivatives) produced about 48.6% of BGCP's total brokerage revenues. And, while brokering OTC financial instruments and related derivative products is the central activity, technology products and services, market data and analytics are also offered.

BGCP's business model is based on trading volume which requires massive scale and breadth across various trading platforms. Since its inception, BGCP has grown through both global acquisitions and enhancement of its existing electronic trading capabilities. As of Sept. 30, 2009, BGC employed 1,423 brokers across 150 desks in 18 cities. In nine months year-to-date 2009, the company processed nearly 11 million transactions totaling more than $86 trillion in notional transaction volume.

BGCP continues to contribute the largest share of Cantor's net revenues. BCGP's revenues are concentrated in EMEA (65%), the Americas (22%) and Asia Pacific (13%). Operating profits have been generated consistently since fiscal 2006, following two years of losses due primarily to significant expansion.

Compensation expense is by far the largest expense category for BGCP. The compensation expense ratio was 60.6% at Sept. 30, 2009. This high compensation ratio can be attributed to three key factors: (1) a variable compensation policy; most of the revenue generating employees and partners are paid a small salary, plus a percentage of the net revenues they generate; (2) non-cash compensation expenses attributable to stock-based award programs; and (3) amortization expense for forgivable loans to employees, and salary/bonus advances provided by the company.

Cantor owns only 38% (approximately) of the outstanding common stock of BGCP, but it holds a majority (85.6%) of the voting rights. Consequently, BGCP is consolidated with Cantor, and a minority interest obligation is recognized for the 62% publicly held common stock interest. Cantor guarantees BGCP's $150 million senior notes due April, 2010.

Counterparty risk appears to be well-managed through client selection, netting and collateral agreements and use of exchanges. Trading limits are established based on internal risk ratings, anticipated estimated trading activity and potential exposure to the instruments traded. The client base is diversified in each of the three main business segments. Aggregate customer exposures are closely monitored for concentrations. Losses due to counterparty default are rare.

Market risk is also contained. There is no proprietary trading conducted. Inventory is limited in size, with high turnover.

Liquidity is managed on an operating entity basis, under the centralized authority of executive management at the holding company. With this structure, the franchise can efficiently deploy available resources internally. Excess liquidity is maintained at the main operating companies as well as at the holding company. Intercompany and external facilities are in place to address any funding gaps that may arise. On a consolidated basis, there is access to secured government facilities such as the primary dealer credit facility (PDCF) and the term securities loan facility (TSLF). General collateral funding via FICC is also available.

Cantor is a broadly held partnership. There were approximately 1,000 Cantor and BGCP partners at June 30, 2009. The capital structure, primarily designed to attract and motivate talent, provides a basic level of support for the balance sheet. Each partner is required to maintain a minimum investment, but most hold interests in excess of requirements. These interests vest, and are non-tradable. Because of the illiquid nature of most equity purchases by and awards to partners, this capital is considered relatively sticky. Liquidation of individual partnership interests is subject to some constraints, namely: non-compete agreements, deferred payouts over a number of fiscal periods, an aggregate limit on redemptions, minimum capital covenants, and net capital requirements. Minority interest and founding/working partners capital constitute additional ownership interests that are available to support balance sheet assets.

As of Sept. 30, 2009, there were approximately 55,006,000 shares of BGCP's Class A common stock outstanding, of which 1% was held by Cantor. Each share of Class A common stock is generally entitled to one vote. Cantor holds all 26,448,000 shares of BGCP's Class B common stock outstanding; each share is entitled to 10 votes. Cantor's combined interest in BGCP constitutes approximately 85.6% of BGCP's voting power. Class A stock trades on the Nasdaq under the symbol 'BGCP'.

There are multiple layers in the Cantor partnership structure, with various capital classes entitled to specific distributions. Some classes receive pre-tax distributions; BCGP's public shareholders receive post-tax distributions. The end result is a high level of earnings distribution, so that growth in the capital base is primarily from direct ownership investment. At this time, the capital base is considered low, absolutely and relative to peers. But because the company's core trading businesses are not capital intensive and have limited credit risk, such modest levels may be more tolerated. Should the company radically alter its business model such that trading intermediation is no longer the primary activity and/or more capital intensive activities are conducted, a concomitant increase in capital levels would be necessary to maintain the current ratings.

The ratings incorporate a number of quantitative and qualitative factors, many of which are outlined in the criteria report 'Rating Methodology for Securities Firms and Investment Companies' dated April 21, 2006, and available on the Fitch web site, 'www.fitchratings.com'.

The business of Cantor and its subsidiaries is primarily wholesale and institutional brokerage of over-the-counter (OTC) financial instruments and related derivatives; Treasury dealer, repo and securities lending, investment banking, and market data and analytics complete the menu of products and services. The major subsidiaries of this private partnership are: broker-dealers Cantor Fitzgerald & Co. (CFCo) and Cantor Fitzgerald Europe; and BGC Partners, Inc. (BGCP), formerly eSpeed Inc. Cantor's managing general partner is CF Group Management, Inc.

Fitch assigns the following ratings:

BGC Partners, Inc.

-- Long-term IDR at 'BBB';

-- Short-term IDR at 'F2'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

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SOURCE: Fitch Ratings

Fitch Ratings, New York 
Brian Bertsch, +1-212-908-0549 
brian.bertsch@fitchratings.com 
Leslie Bright, +1-212-908-0622 
Sharon Haas, +1-212-908-0632