Fitch: Fixed Income Continues to Drive Improving Revenue Trend at Jefferies
NEW YORK -- April 15, 2013
Jefferies Group LLC (Jefferies) this week reported earnings that were fairly
consistent with the last several quarters and in line with Fitch Ratings'
expectations, and therefore credit neutral.
Given the seasonal benefit in the first quarter and relatively benign market
conditions, Fitch was anticipating an improvement in Jefferies' performance.
The incremental improvement in Jefferies' overall results was mainly driven by
its fixed income business, which were strong and in line with Fitch's
expectations. However, the continued weakness in the firm's equities segment,
despite improved market activity, demonstrates the importance of scale in this
business. The firm's M&A advisory revenues continue to be depressed as many
clients remain on the sidelines.
Fitch has a cautious view for the remainder of 2013 as renewed uncertainty in
the Eurozone and the weaker outlook for economic growth could act as headwinds
for earnings. These concerns are countered by strong performance in the U.S.
leverage finance market.
Net revenues increased 4.2% on a quarter-over-quarter basis and 4.5%
year-over-year. The improvement was mainly driven by stronger performance in
fixed income trading, which was up 15% from last quarter and down 0.7% from
the prior year period. Equity trading revenues continue to be weak relative to
historical levels, as trading volumes remain depressed. Jefferies' results
benefitted from unrealized gains on its position in Knight Capital Group
(Knight), which contributed $27 million of net revenues in the first quarter
of 2013 (1Q'13). Strong activity in the high-yield market has helped bolster
Jefferies' trading revenues over the last several quarters.
Investment banking remained virtually flat with both the linked quarter and
the prior year period. While there was some pick-up in M&A activity during the
first quarter, Jefferies' advisory fees remained near the trough experienced
during the previous quarter. Equity capital markets revenue had some
improvement, which was partially offset by a modest decline in debt capital
Non-interest expenses were up slightly from the prior quarter due to an
increase in compensation expense and costs related to the firm's recent merger
with Leucadia National Corp. (Leucadia). The compensation ratio remains at
approximately 59%, and is viewed by Fitch as a rating constraint. Fitch
expects the compensation ratio to trend back down as recent hires achieve
run-rate revenue production and the amortization of certain compensation
expenses from recent acquisitions runs off.
Firm-wide average Value at Risk (VaR) declined to $9.3 million from $13.3
million quarter-over-quarter (including Knight), largely reflecting reduced
volatility in the dataset and an increase in the diversification benefit.
Jefferies' uses a one year look-back period, which resulted in a lower
volatility dataset, reflecting the more benign market environment. One of the
main weaknesses of the VaR metric is that it tends to underrepresent market
risk during periods of low market volatility. The firm's investment in Knight
comprised approximately 37% of the firm-wide average VaR during the fourth
quarter. Fitch believes that the VaR levels, particularly excluding the impact
from Knight, are unusually low and expects some increase in future periods.
Both the size of the balance sheet and leverage increased modestly during the
first quarter. Fitch-calculated leverage was 10.4x as of Feb. 28, 2013,
compared to 9.7x at Nov. 30, 2012. Fitch expects that over time, as market
conditions continue to stabilize, the firm may continue to manage its leverage
modestly higher. Jefferies continues to maintain a solid liquidity buffer,
with $3 billion in cash and equivalents and approximately $1.7 billion in
Fitch has recently lowered Jefferies' long-term Issuer Default Rating (IDR) to
'BBB-', and equalized it with the long-term IDR of its parent company,
Leucadia. For more information, please see the press release titled 'Fitch
Equalizes Jefferies' and Leucadia's L-T IDRs at 'BBB-' After Merger; Outlook
Stable' available at www.fitchratings.com.
Jefferies, a Delaware-incorporated holding company, is a well-established
full-service investment banking 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 Feb. 28, 2013,
Jefferies had U.S. GAAP total assets of $37.8 billion and shareholders' equity
of $3.3 billion (including non-controlling interests).
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Fitch Equalizes Jefferies' and Leucadia's L-T IDRs at 'BBB-' After Merger;
Outlook Stable', March 7, 2013;
--'2013 Outlook: U.S. Securities Firms', Nov. 9, 2012.
Applicable Criteria and Related Research
2013 Outlook: U.S. Securities Firms
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Ilya Ivashkov, CFA
Press spacebar to pause and continue. Press esc to stop.