Friday, August 3, 2012

Knight Capital Group Inc. (NYSE:KCG): One Day Rally Is Not Enough

Knight Capital Group Inc. (NYSE:KCG) has announced pre-tax loss of $440 million arising from routing error to NYSE for shares of approximately 140 stocks because of technology failure that had occurred in the Company’s market-marking unit.

 The technology failure had been the consequence of the installation of trading software, the malfunctioning of which led to erroneous trade positions leading to a pretax loss of $440 million. The loss has hit the Company’s Capital structure too severely which is estimated to be around 41% of the tangible equity reported by KCG at the end of the second quarter of 2012.

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The Company has announced of exploring all alternatives, including a sale to cover up the loss recorded. The electronic market making business comprises 40% of Company revenue and 60% of the profits.

KCG’s excess net capital held at its broker-dealer Subsidiaries was $513 million at the end of first quarter 2012 with the Subsidiaries also having a $200 million revolving credit facility. The debt structure of KCG comprised of a $300 million convertible notes and $100 million 3-year term loan.

Price target and estimated earnings have been slashed for the fiscal as the analysts are still to evaluate the Company’s ability to recover from the loss given the constraints the loss will put and the valuation erosion faced by KCG.

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Shares of the company are still down over 61% (Since reporting loss on Wednesday) after today’s gain of 57% at $4.05. But analysts still find some hope that the Company will work out some solution to overcome the loss.

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