S&P downgrades CME Group to AA-

February 7, 2012 06:00 PM

NEW YORK (Standard & Poor's) Feb. 8, 2012--Standard & Poor's Ratings Services said today that it lowered its long-term issuer credit rating on CME Group Inc. (CME Group) to 'AA-' from 'AA' and affirmed its 'A-1+' short-term rating on the company. The outlook on the long-term rating is negative. Standard & Poor's also said that it lowered its senior unsecured debt rating on the $612.5 million 4.4% notes due 2018 issued by CME Group Index Services LLC to 'AA-' from 'AA'. CME Group guarantees the notes.

"The rating actions follow several instances of CME Group providing limited financial support to the trading customers of its defaulted clearing members," said Standard & Poor's credit analyst Charles Rauch. In November 2011, CME Group announced that it would provide a $250 million guarantee to the Securities Investor Protection Corp. trustee of the estate of MF Global, which filed Chapter 11 bankruptcy in October. The guarantee, which was subsequently increased to $550 million, is intended to assist the trustee in releasing MF Global customers' segregated funds and frozen cash balances. Further, on Feb. 2, 2012, CME Group announced that it would establish a $100 million Family Farmer and Rancher Protection Fund (Farmer Fund) as an additional means to restore confidence in its markets. CME Group could use the Farmer Fund to indemnify select customers in the event of a clearing member default.

We do not believe that the MF Global guarantee and the Farmer Fund, even if fully called, present significant financial risk to CME Group. Together, they amount to about six months of CME Group's free operating cash flows. As of Dec. 31, 2011, CME Group had $1.0 billion of cash and cash equivalents on the balance sheet, although $360 million is earmarked for various clearing guarantee purposes. "The potential financial impact of the MF Global guarantee and the Farmers Fund likely will not be a rating issue," said Mr. Rauch. "But we believe that the ramifications of CME Group's support of its clearing members' customers expand the firm's long-standing mandate of guaranteeing trades among its clearing members."

The rating actions also incorporate the incremental credit risks from the sudden growth of CME Group's over-the-counter (OTC) clearing volumes. We have gained some comfort with CME Group's financial safeguards for OTC interest rate swaps because it has a long history risk managing listed interest rate futures and options contracts. But we are less comfortable with CME Group's expansion into credit default swaps because these products are outside the clearinghouse's historical expertise. Further, its margining technique, which is based on a multifactor risk model, has not yet withstood the test of time.

The negative outlook on CME Group takes into consideration our view of the potential legal, regulatory, and reputational fall-out from MF Global's bankruptcy. Further, against this unquantifiable risk overhang, CME Group has taken a more aggressive approach to capital management, especially regarding its quarterly regular and annual variable common dividends. Consequently, CME Group's liquidity buffer is less than it seems, in our opinion, especially since the company has $750 million of long-term debt due in August 2013. We could lower the rating on CME Group if legal and reputational issues take a long-term toll on its franchise and financial position. Alternatively, we do not see any upside potential in the rating at this time.

S&P cuts rating on CME Group

S&P cuts long-term rate on CME Group

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