Knight Capital Group Inc. (KCG), which was on the verge of bankruptcy after recording trading losses of $440 million, was resurrected after successfully receiving $400 million capital infusion from a group of investors. Impelled by a software failure on August 1, the company recorded losses, which led to a 75% drop in its share prices last week.
Knight Capital came up with the sale of preferred stock which will be convertible into approximately 267 million common shares at an average price of $1.50 per share. Such a move will dilute the holdings of its existing shareholders.
The group of investors who entered into the deal includes Getco LLC, an automated trading firm, The Blackstone Group LP (BX), brokerage firms-Stifel Nicolaus & Co., a subsidiary of Stifel Financial Corp. (SF) and TD Ameritrade Holding Corporation (AMTD). The group also includes the two investment banks - Stephens Inc. and Jefferies Group Inc. (JEF).
About 73% of Knight Capital's stake will be held by the new group of investors once the preferred shares get converted into stock. Moreover, these shares will yield a dividend of 2% for the investors.
Under the terms of the deal, three board seats will be reserved for the investors' group. In a regulatory filing, Knight Capital announced two seats will be allotted to Blackstone and Getco's parent company - General Atlantic, while the third seat will be offered to Jefferies. Moreover, such rights will be retained by the investors till they have a minimum of 25% holdings of the preferred shares purchased.
Knight Capital, the largest U.S. provider of retail market-making in New York Stock Exchange and NASDAQ-listed stocks, buys and sells shares for clients. Through its market-making unit, the company also provides liquidity to equity markets by buying and selling stocks with its own capital to maintain the orderly activity.
As issuance of convertible securities requires shareholders' approval, Knight Capital's step might lead to shareholders' litigations in the current financial scenario. Moreover, troubles for the company might amplify if the Securities and Exchange Commission (SEC) confirms the violation of regulations.
Though the company is working hard to recoup losses and clients' confidence, legal issues will quadruple the troubles. Shares of Knight Capital currently retain a Zacks #5 Rank, which translates into a short-term Strong Sell rating.