Fitch Places Jefferies' 'BBB' L-T IDR on Rating Watch Negative on Proposed
Merger with Leucadia
NEW YORK -- November 12, 2012
Fitch Ratings has placed Jefferies Group, Inc.'s (Jefferies) long-term Issuer
Default Rating (IDR) and short-term IDR on Rating Watch Negative. A full list
of rating actions follows at the end of this press release.
Today's action follows Jefferies' announcement that it has entered into a
definitive agreement to merge with Leucadia National Corp. (Leucadia;
'BB'/Rating Watch Positive). Fitch expects to resolve the Rating Watch
Negative once the merger is completed in the first quarter of 2013. Assuming
the transaction is completed, and absent material credit developments in the
interim, the outcome is expected to result in a one-notch downgrade of
Jefferies' long-term IDR to 'BBB-' and short-term IDR to 'F3'.
The expected one-notch downgrade reflects Fitch's view that after the proposed
merger, Jefferies would become much more exposed to the market risk inherent
in the other subsidiaries' investments at Leucadia. Conversely, becoming a
privately-owned company may help insulate Jefferies from external market
pressures similar to those experienced in November 2011 Fitch believes that
management's interest would generally be aligned between Leucadia and
Under Fitch's criteria 'Rating FI Subsidiaries and Holding Companies',
Jefferies would be considered a core subsidiary based on its significance
relative to Leucadia's equity and the likely role it will play in the combined
company's future strategic direction. Key executive management will be shared
by both firms although each will retain a separate Board of Directors. Fitch
believes that management has discretion to move capital between Jefferies and
Leucadia, although that is not expected under normal market conditions.
Fitch would not expect Jefferies' core business strategies and operations to
be materially impacted by the proposed ownership change, although management's
ability to balance time demands between Jefferies and Leucadia would be an
important consideration. Fitch's rating view also incorporates an assumption
that Jefferies would continue to maintain its current liquidity, leverage and
enhanced funding profile post-transaction.
Converting to private ownership and becoming a direct subsidiary of Leucadia
is expected to provide several tangible financial benefits to Jefferies. For
example, it would allow Jefferies to terminate the dividends on its common
stock, which total approximately $60 million per year. Furthermore, Jefferies
would no longer be required to make minority interest distributions to
Jefferies High Yield Holdings, which have totaled $110 million over the last
three fiscal years. Finally, Leucadia also will have the ability to limit
Jefferies' Federal income tax distributions by utilizing the $4.7 billion of
net operating losses available at Leucadia.
Post-merger, Jefferies' and Leucadia's long-term IDRs are expected to be
equalized at 'BBB-'. Given the ratings linkage, material changes in either
entities' credit profile will have an impact on their ratings. The 'BBB-'
rating would reflect the proposed operating parameters articulated by
Jefferies and Leucadia management, including:
--Maintaining Leucadia's debt-to-equity ratio below 0.5x, assuming Leucadia's
two largest investments are fully impaired and the DTA is excluded from the
--Maintaining Leucadia's ratio of minimum liquid assets to parent company debt
--Maintaining Leucadia's minimum cash and equivalents of at least 10% of book
value (excluding Jefferies); and
--Limiting Leucadia's single largest investment to 20% of book value with all
other investments limited to 10% of book value (both excluding Jefferies).
Rating Drivers and Sensitivities
Positive rating drivers over the longer-term would include Leucadia's
demonstrated commitment to a conservative liquidity profile, limited
investment concentrations and reduced leverage at the parent company as well
as maintenance or improvement of Jefferies' current credit profile. The
interaction between Jefferies and Leucadia will play an important role in the
longer-term value and risk profile of the combined franchise, in Fitch's view.
Jefferies' and Leucadia's ratings could be negatively impacted by an increase
in leverage, a less conservative liquidity or funding profile or more
aggressive growth strategy at either entity. Ratings would also be negatively
impacted if Fitch perceives the risks taken in Leucadia's investment portfolio
as increasing materially from current levels. Fitch will continue to assess
the ability of Jefferies' management team to run both companies effectively.
Furthermore, unanticipated departure of key executives at either Jefferies or
Leucadia could result in negative actions.
Jefferies, a Delaware-incorporated holding company, is a well-established full
service investment bank and institutional securities firm primarily serving
middle-market clients and investors. Its primary broker/dealer operating
subsidiary, Jefferies & Company, Inc., holds the vast majority of the firm's
consolidated assets and is regulated by the SEC. At Aug. 31, 2012, Jefferies
had U.S. GAAP total assets of $34.4 billion and shareholders' equity of $3.4
billion (including non-controlling interests).
Fitch has placed the following ratings for Jefferies Group, Inc. on Rating
--Long-term IDR 'BBB';
--Short-term IDR 'F2';
--Senior unsecured debt 'BBB';
--Short-term debt 'F2';
--Subordinated debt 'BB+'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Securities Firms Criteria' (Aug. 15, 2012);
--'Fitch Places Leucadia National's IDR on Positive Watch on Proposed Merger
with Jefferies Group' (Nov. 12, 2012);
--'Fitch: Jefferies Core Earnings Slightly Weaker, Credit Neutral' (Sept. 20,
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Securities Firms Criteria
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One State Street Plaza
New York, NY 10004
Ilya Ivashkov, CFA
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