Refco Files for bankruptcy

[Sniper]

Refco to Sell Core Business for $768 Million, Files for Chapter 11 Bankruptcy Protection


NEW YORK (AP) -- Troubled commodities broker Refco Inc. filed for Chapter 11 bankruptcy protection late Monday and said it had reached a preliminary deal to sell its core futures brokerage business to a group of private investors for $768 million.

The consortium of would-be buyers for Refco LLC is led by private buyout firm J.C. Flowers & Co. LLC, which specializes in taking distressed financial companies and either turning them around or selling the pieces to other companies.

As part of the agreement, Refco said it will have the option to retain up to 20 percent of the equity value of the entities being sold.

The company said Mark Winkelman will serve as chairman of Refco LLC. Winkelman was formerly head of J. Aron & Co. and co-head of Goldman Sachs' fixed income division. Jacob Goldfield will serve as vice chairman.

The Flowers-led consortium includes The Enstar Group, Inc., Silver Point Capital, MatlinPatterson Global Advisers LLC, and Texas Pacific Group. Refco said it expects definitive agreements to be reached soon.

The bankruptcy filing does not cover Refco's regulated subsidiaries -- Refco LLC, Refco Overseas Ltd. and Refco Singapore Ltd, and the registered broker dealer Refco Securities LLC.

The bankruptcy and brokerage sale capped a week of stunning disintegration for Refco, which disclosed Oct. 10 that its former CEO, Phillip R. Bennett concealed a $430 million debt from the company's books. Bennett was arrested and charged with securities fraud after repaying the company that amount with interest.

Authorities said the hidden debt was as high as $545 million at one point.

The company last week froze customer accounts in its Refco Capital Markets offshore broker subsidiary until next week, and said Thursday it would liquidate its Refco Securities LLC subsidiary, which trades stocks, bonds and credit products.

While the company has refused to comment beyond its terse press releases, the subsidiary moves speak to an exodus of customers from all parts of Refco, analysts said, leading to a loss of assets and revenue potentially far greater than that caused by Bennett's alleged misconduct.

Shares of Refco, which went public in August, lost more than 70 percent of their value last week and the New York Stock Exchange halted trading in the stock on Thursday.

For Refco, J.C. Flowers & Co. is likely less a white knight and more a repo man. The company, formed in 2000 by former Goldman Sachs Group Inc. investment banker J. Christopher Flowers, has revived the fortunes of some companies, most notably Japan's Shinsei Bank Ltd. Flowers also led the group that purchased Dutch bank NIB Capital NV for $2.5 billion in August, and last month agreed to buy the wholesale unit of insurer Marsh & McClennan Co.

In Refco's case, however, customers are unlikely to return to the company. Commodities traders are likely to have already moved their accounts to other brokerages.

"I think, in this case, the parts of Refco are greater than the whole," said Denise Valentine, senior analyst at financial consulting group Celent. "There's been too much damage to turn it around and revive it."

Commodities and futures trading has become increasingly attractive to major Wall Street firms who have faced a sluggish stock market and low bond yields in the past year. Commodities such as oil, metals and agricultural products have done very well. Merrill Lynch & Co. launched its commodities trading this year, and it's considered a key piece of most investment and banking companies' growth strategies.

For its sale talks, Refco hired the services of Greenhill & Co., another investment bank, in its talks with Flowers. Refco had hired Goldman Sachs, one of its underwriters in its August initial public offering, as its financial adviser during the crisis, but hired Greenhill to avoid any conflict of interest due to Flowers' history as a Goldman employee.

[Ed Miller]

Wow.. Goldman Sachs is gonna get sued.

[DesertCat]

As soon as the news hit about the scandal, someone on ValueInvestors.com recommended Refco for a short. Not only was it a great call, but you could have hedged it with Refco bonds trading at around 30. I of course sat on my hands...

another awesome bankruptcy play weeeeeeeeeeeeeeeee!