Fitch: Jefferies' Reports Strong 4Q'13 Results on Improvement Across
NEW YORK -- December 17, 2013
Jefferies Group LLC (Jefferies) today reported solid quarterly results, which
were up significantly from a challenging third quarter, according to Fitch
Ratings. The improvement in performance was broad-based, with both the sales &
trading and investment banking businesses seeing strong quarterly revenues.
Fitch believes the stronger results this quarter help counterbalance a
relatively weak third quarter of 2013 (3Q'13), and are considered to be credit
Investment banking showed solid improvement, with revenues increasing 31% from
the prior quarter and 14% on a full-year basis. Equity capital markets (ECM)
exhibited record quarterly and annual performance, which was underpinned by an
active primary market, as well as the firm's investment into this business.
While debt capital markets (DCM) revenues have declined every quarter in 2013,
the full-year figure was still up 18% from the prior year. Fitch believes DCM
could see a weaker 2014, particularly if interest rates start to increase more
rapidly. Advisory revenues remained robust despite a modest reduction from the
Sales and trading revenues benefitted from a more benign market environment
during the fourth quarter. However, full-year results were down 17% from the
prior year, primarily as a result of a very challenging 3Q'13 for fixed
income. During the third quarter, fixed income results were challenged by
mark-to-market (MTM) losses on the firm's inventory and muted trading
activity. Performance improved during the most recent quarter, but remained at
subdued levels, comparable to 1Q'13.
Reported equity trading revenues were up 95% from the prior quarter, while
fiscal year 2013 (FY13) revenues were up 15% from the prior year. These
results reflect positive sentiment in the equity markets as well as sizeable
MTM gains. Excluding the MTM gains on KCG Holdings, Inc. (KCG) and Harbinger
Group, Inc. (HRG), which Fitch considers non-recurring, core equity revenues
were up 10% from the prior quarter.
Jefferies recorded $110 million in MTM gains from its position in KCG and its
more recent investment in HRG. For FY13, the firm recognized $114 million in
MTM gains on these two positions. Fitch estimates that Jefferies' investment
in KCG and HRG was $189 million and $212 million, respectively, based on
recent share prices. The firm is one of the largest shareholders in both KCG
and HRG, with respective ownership stakes of 14% and 13%. Fitch continues to
view these investments as relatively large and opportunistic, but does not
expect them to have any rating implications at the current levels.
Value at Risk (VaR) increased further during the quarter, as Jefferies added
to its holdings of KCG and added HRG. VaR is likely to remain elevated until
Jefferies reduces these investments, which represented approximately 42% of
firm-wide VaR during the fourth quarter.
Adjusted leverage (net assets divided by tangible equity) was 9.9x as of Nov.
30, 2013 and remained virtually flat from the prior quarter, as the modest
increase in the balance sheet was offset by a rise in tangible equity.
Jefferies' relatively conservative posture remains prudent given uncertain
market conditions. However, Fitch expects that over time, as conditions
improve, the firm may manage its leverage levels to somewhat less conservative
levels. Jefferies' liquidity buffer decreased modestly from the prior quarter
and remains adequate in the context of its current rating.
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 LLC, holds the vast majority of the firm's
consolidated assets and is regulated by the SEC. At Nov. 31, 2013, Jefferies
had U.S. GAAP total assets of $40.2 billion and shareholders' equity of $5.4
billion (including non-controlling interests and $1.4 billion of goodwill from
the recent merger). Fitch considers Jefferies to be a core subsidiary of
Leucadia based on Jefferies' significance relative to Leucadia's equity and
the likely role it will play in the combined company's future strategic
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'2014 Outlook: U.S. Securities Firms', Nov. 21, 2013.
Applicable Criteria and Related Research:
2014 Outlook: U.S. Securities Firms (Capital and Liquidity Counterbalance
Challenging Market Conditions)
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.
Ilya Ivashkov, CFA
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Brian Bertsch, New York, +1 212-908-0549
Press spacebar to pause and continue. Press esc to stop.