On Monday, the company reported that its board had put Phillip Bennett, its chairman and CEO, on leave because of a $430 million receivable that had not been reported as a related-party transaction. The company said Bennett had repaid the amount, with interest, in cash.
At the same time, the company announced that its latest quarterly filing with the Securities and Exchange Commission would be delayed -- but then gave the business highlights for that quarter and said it had excess regulatory capital of $279.3 million.
On Tuesday, a supplemental disclosure was made that, while discussing the previously announced receivable issue, also said, "The company confirms that it has adequate liquidity to run the business in the ordinary course."
Also on Tuesday, Bennett was arrested on charges of securities fraud.
On Thursday, the company issued an unusual announcement, headlined "Refco Hires Advisors." But the hiring of two high-profile advisors for its board and the retaining of Goldman Sachs
The press release revealed that Refco's Capital Markets subsidiary did not have sufficient capital to continue operations, so it imposed a 15-day moratorium on the operation to "protect the value of the enterprise." In plain English, the company does not have sufficient liquidity to complete its transactions. It is required to act as counterparty to customers' positions in its role as a clearinghouse -- and the company requires a significant and steady supply of liquid assets to do so.
This press release also states that the regulatory capital and excess regulatory capital of Refco and Refco Securities have been "substantially unaffected by the events of this week."
And that raises another interesting question. The company's creditors announced a meeting Friday morning to determine the status of their outstanding receivables. Events of the past week will probably result in default or violation of the company's loan covenants, thus enabling its creditors to demand immediate repayment of debts. Doing so would effectively cripple Refco, since it holds $1 billion in debt and posts only $200 million in shareholder equity. Furthermore, I believe creditors will be loath to extend future credit to the company, making an already difficult situation nearly impossible to remedy.
Today, the company said that its Refco Securities subsidiary will initiate a process to unwind proprietary and client positions. In plain English, Refco is liquidating this operation.
While the SEC is trying to prevent money from exiting the company and the rating companies are downgrading the debt through junk-status ratings, the fact that "fraud" has now been charged is all investors need to know.
How much is Refco worth, if anything? There is not enough information available today to answer that question, though I'm leaning toward saying "nothing."
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