FCStone Sees Rising Debt Amid Market Volatility

November 3, 2008 06:00 PM

Pro Farmer Editors


FCStone Group, Inc. reported it expects to incur up to a $25 million pre-tax bad debt provision for the first quarter of fiscal 2009 in connection with losses by three domestic accounts for which FCStone serves as the clearing firm or counterparty. These losses, driven by unprecedented volatility in the commodity and foreign exchange markets, relate primarily to a significant energy trading account, and to a lesser extent, a renewable fuels account and a foreign exchange account.

"The estimated bad debt provision is expected at this time to be adequate for all known existing credit contingencies for the first quarter of fiscal 2009. This estimated bad debt provision is based upon currently available information, market conditions and account positions, which could change before the end of the first quarter on November 30, 2008," says the firm in an official statement. "The company experienced no material impacts from credit issues during the fourth quarter of our fiscal 2008 year ended August 31, 2008. In addition, the company can report that it has no direct credit exposure relating to VeraSun Energy Corporation, which filed for bankruptcy protection last week."

These losses if realized on an after tax basis would be approximately $15 million, or $0.52 per share. For comparison purposes, the company realized an average of $0.45 of net income per quarter from continuing operations through the first three quarters of fiscal 2008 for a total of $1.36 per share for the nine months ended May 31, 2008, says the company.

"FCStone has taken and is taking appropriate actions to mitigate these exposures. The company has taken specific steps intended to reduce the market risk associated with the trading position of the energy account. Nonetheless, no assurances can be given that additional losses on this account will not be recognized," says the group. "FCStone may recover a portion of the losses on the energy account from the introducing broker of that account under a sharing agreement between FCStone and the introducing broker, but no assurances can be given as to the amount and timing of recovery that may be obtained under that agreement."

"More generally, FCStone has added to its internal credit risk management staff and in addition to regular monitoring its clearing customers' accounts, it has concluded a complete review of those accounts. The company has also retained an external consultant to review all of the company's credit risk procedures, processes and systems. The company believes that it has made appropriate adjustments to its monitoring system designed to substantially reduce the risk of failures of these types in the future," they add.

FCStone believes that its capital position and liquidity remain strong. "It has credit lines for its operations totaling $511 million, which includes $56 million in committed subordinated debt lines available for regulatory purposes, $270 million of committed revolving margin lines and $185 million of available commodity repurchase financing lines evidenced by warehouse receipts and available for use in connection with our customer inventory financing program. Current outstanding balances under these facilities consist solely of $16 million in subordinated debt and $17 million in repurchase financing. As of May 31, 2008, the company reported consolidated stockholders' equity of $217 million," says the group.

The company's futures commission merchant subsidiary, FCStone LLC, had minimum regulatory capital requirements as of October 30, 2008 totaling approximately $54.3 million. At that time, the company had capital in excess of its regulatory requirement of $46.1 million, access to additional capital obtainable by the elimination of "haircuts" on investments totaling $11.8 million and undrawn subordinated debt of $40 million bringing the total available excess capital to $97.9 million.


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