--Rescue plan will help fill hole left by errant trading last
week
--Knight entered into 'securities purchase agreement'
--Investor group includes Jefferies, TD Ameritrade and Getco,
sources say
By Saabira Chaudhuri and Jacob Bunge
Knight Capital Group Inc. (KCG) on Monday confirmed that the
embattled brokerage had agreed to a $400 million rescue plan that
would help fill a hole left by errant trading last week.
The Jersey City, N.J.-based firm told regulators in a filing
Monday that the firm had entered into a "securities purchase
agreement" on Aug. 6, selling $400 million worth of 2% convertible
preferred stock in itself to a group of investors. Those securities
will be convertible into about 267 million shares of common stock
in the company. Knight currently has about 89 million shares
outstanding.
The deal was anticipated to be "consummated" Monday, according
to the filing from Knight.
In a statement, Knight said as a result of the loss it
"experienced reduced order flow and liquidity pressures, and its
capital base was severely impacted."
Knight shares were down 33% to $2.72 in recent premarket
trading. The stock closed Tuesday, before the glitch, at
$10.33.
Separately, the New York Stock Exchange advised Monday morning
that it has temporarily assigned custodial responsibility for about
680 stocks listed on its NYSE and NYSE MKT exchanges to the
designated-market-maker unit of Knight rival Getco LLC. The
exchange said the stocks would be reassigned to Knight upon
"completion and approval of a recapitalization plan." The NYSE said
the decision was reached "in full cooperation" with Knight and
Getco.
Knight typically handles some $20 billion of shares a day
through the New York Stock Exchange, much of that for retail
brokerages that serve small investors. Early Friday, the
17-year-old firm told customers it had received a line of credit to
allow it to stay open for business, but some of the firm's largest
clients continued to steer their business to rivals.
The investor group includes the bank Jefferies Group Inc. (JEF),
brokerage giant TD Ameritrade Holdings (AMTD) and Getco, according
to people close to the discussions. Stifel Financial Corp.,
Blackstone Group LP and Stephens, the Arkansas investment bank,
were also among potential investors, the Journal said.
The deal ensures Knight remains afloat and able to trade, but
could also presage a breakup of the company, according to a
research note Monday from J.P. Morgan Chase & Co.
"The company was already trading in the mid-single digits given
the lack of transparency, and valuations as a going concern will
likely fall meaningfully from there," wrote analyst Kenneth
Worthington. "Given this perspective, we expect investors will look
to value the [Knight] pieces, expecting the parts to be divested at
more opportunistic times."
Knight's request that it be allowed to cancel many of last
Wednesday's errant trades was rejected by Mary Schapiro, chairman
of the Securities and Exchange Commission, forcing Knight to unload
the stock it had bought, incurring the $440 million loss. Goldman
Sachs Group Inc. (GS) bought the stock in a bulk lot at a discount.
The errant trades were fired off a day after Knight installed
software related to the launch of a New York Stock Exchange
platform aimed at attracting more retail investors.
--Saabira Chaudhuri contributed to this article.
Write to Jacob Bunge at jacob.bunge@dowjones.com