May 24, 2017 / 2:53 PM / 2 months ago

Fitch Rates Virtu's Secured Second-Lien Notes 'B+'

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(The following statement was released by the rating agency) NEW YORK, May 24 (Fitch) Fitch Ratings has assigned a rating of 'B+' to the new $825 million five-year secured second-lien notes being issued by VFH Parent LLC (VFH), a debt-issuing subsidiary of Virtu Financial LLC (Virtu), in connection with the firm's acquisition of KCG Holdings Inc. (KCG). For more information on the transaction, please refer to Fitch's press release, 'Fitch Affirms Virtu at 'BB-' Following KCG Announcement; Outlook Stable' and 'Fitch Rates Virtu Entity and New Secured Term Loan 'BB-'; Outlook Stable', available on Fitch's website at www.fitchratings.com. A complete list of rating actions follows at the end of this release. KEY RATING DRIVERS - IDR and SENIOR DEBT The debt rating of 'B+' on the secured second lien notes is one notch lower than VFH's Issuer Default Rating (IDR) and senior secured term loan ratings of 'BB-', reflecting the notes' subordinated position behind the senior secured term loan, and, therefore, higher loss severity potential under a stress scenario. VFH is a wholly-owned subsidiary of Virtu and as such, its ratings are aligned with those of Virtu and reflect the firm's established market position as a technology-driven market-maker across various venues, geographies and products, its diversified and growing revenue base, scalable business model, and experienced management team. Fitch believes that Virtu's passive, market-neutral trading strategies in highly liquid products and extremely short holding periods minimize market and liquidity risks. Additionally, the firm's risk controls are believed to be robust, as evidenced by minimal instances of material historical operational losses. VFH's ratings are constrained by elevated operational risk inherent in technology-driven trading, reliance on volatile transactional revenue, potential competitive threats arising from evolving market structures and technologies and heightened regulatory scrutiny of designated market-making, high-frequency trading and dark pools. Other rating constraints include elevated post-acquisition leverage, a relatively limited funding and liquidity profile primarily reliant on short-term secured funding facilities, an elevated payout ratio and a moderate level of key-man risk associated with Virtu's co-founders whose departures could affect Virtu's franchise and long-term strategic direction. The Stable Outlook reflects Fitch's expectations for strong execution on the integration of KCG, a termination of the proprietary trading activities at KCG, realization of approximately $440 million in capital synergies allowing for deleveraging in the near term, and gradual realizations of expense synergies allowing for additional de-leveraging over the Outlook horizon. The Outlook also reflects the belief that Virtu will maintain its low market-risk profile, consistent management team, and strong liquidity levels. RATING SENSITIVITIES The rating on the secured second-lien notes is one notch lower than VFH's IDR and would be expected to move in tandem with changes to VFH's IDR. Virtu and VFH's ratings could be negatively impacted by an increase in the firm's risk profile post-acquisition, resulting from the continuation of proprietary trading, and an inability to execute on the projected capital synergies allowing for debt principal reduction in the months following the transaction close. Additionally, shortfalls in projected cost savings and/or debt reductions that prevent leverage from declining below 3.5x, on a debt-to-adjusted EBITDA basis, over the Outlook horizon would also pressure ratings longer-term. Negative rating actions could also result from material operational or risk management failures, adverse regulatory or legal actions, failure to maintain Virtu's market position in the face of evolving market structures and technologies, and/or deterioration in the firm's liquidity profile. Positive rating action, though likely limited to the 'BB' rating category, could result from continued strong operating performance and minimal operational losses over a longer period of time while returning and sustaining cash flow leverage levels below 3.5x. In addition, a higher proportion of recurring revenue derived from service contracts and increased funding flexibility, including demonstrated access to third party funding through a variety of market cycles, could also contribute to positive rating momentum. Fitch has assigned the following rating: VFH Parent LLC --Senior second lien notes of 'B+'. Contact: Primary Analyst Justin Fuller, CFA Senior Director +1-312-368-2057 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Michael Dodge Associate Director +1-212-908-0379 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. 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