Fitch: Jefferies' 2Q'14 Slowdown Shows Lack of Market Momentum

  Fitch: Jefferies' 2Q'14 Slowdown Shows Lack of Market Momentum

Business Wire

NEW YORK -- June 17, 2014

Jefferies Group LLC (Jefferies) reported weaker results in second quarter 2014
(2Q'14), following two consecutive quarters of strong financial performance.
The sequential decline in net revenues was driven by slower activity across
all of the firm's businesses. The recent dearth of volatility and trading
volumes in the markets has made it challenging for Jefferies and its peers to
generate stable revenues. Jefferies' 'BBB-/F3' ratings, which were last
affirmed by Fitch Ratings in March, incorporate the inherent cyclicality of
the business, and are therefore not acted by the decline in net revenues.

Quarterly net revenues of $723 million were down 19.6% from a record 1Q'14,
but up 13.1% year-over-year (including mark-to-market impact on holdings of
Harbinger Group, Inc. [HRG] and KCG Holdings [KCG]). All of Jefferies'
business segments reported weaker revenues during the quarter, with the
biggest declines in Fixed Income and Equity Trading, as well as M&A Advisory.
Total Sales & Trading net revenues were down 16.8% from the linked quarter,
while Investment Banking revenues declined 20.1%. Jefferies' 2Q'14 net income
of $61.3 million was down 45.5% from the linked quarter, but 55.2% higher than
the prior year period.

Net revenues for Fixed Income Trading were down 24% from the first quarter,
which tends to be a seasonally stronger period. The magnitude of the decline
is generally consistent with the guidance provided by Jefferies' larger peers,
which will report their results next month. However, Fitch believes that
Jefferies' product mix and unique reporting periods make it difficult to draw
parallels to competitors' performance. On a year-over-year basis, Jefferies'
fixed income revenues were virtually flat compared to a challenging 2Q'13.

Equities Trading revenues fell approximately 5% from the prior year period,
excluding the impact of HRG and KCG. In March 2014, Jefferies sold its entire
position in HRG (18.6 million shares) to its parent company, Leucadia National
Corp. (Leucadia, rated 'BBB-'). Fitch views this transaction positively for
the stand-alone credit profile of Jefferies, as it removes a sizeable block of
equity from the firm's balance sheet. That said, Fitch equalizes the ratings
of Jefferies and Leucadia to reflect the potential for capital movement
between the entities and the shared senior management, so the transfer is
generally viewed as neutral from perspective of the combined enterprise.

The Asset Management segment had a negative impact on results during the
quarter, with a net loss of $3.1 million. This was caused by write-downs in
certain funds partially owned by Jefferies, as well as a reduction in fee
income. Fitch believes both of these items were at least in part caused by
Jefferies' ongoing consolidation of the asset management businesses at the
Leucadia level.

The firm's risk appetite remained relatively consistent, as evidenced by a
virtually flat balance sheet and lower firm-wide value-at-risk (VaR), although
the recent benign market conditions also contribute to lowered VaR. Jefferies'
average assets during 2Q'14 increased by a modest 2.7% and stood at $50.4
billion. Adjusted net leverage (net assets divided by tangible equity)
decreased to 10.5x as of May 31, 2014 from 10.7x as of Feb. 28, 2014. Fitch
continues to view Jefferies' leverage and VaR levels as relatively
conservative. The liquidity buffer has increased from 1Q'14, which tends to be
a seasonally lower period as a result of cash bonus payments.

Jefferies, a Delaware-incorporated holding company, is a 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 May 31, 2014, Jefferies had U.S. GAAP
total assets of $43.6 billion and shareholders' equity of $5.5 billion
(including non-controlling interests and $2 billion of goodwill). 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 direction.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Fitch Affirms Jefferies' Long- and Short-Term IDRs at 'BBB-/F3'; Outlook
Stable', March 6, 2014;

--'Fitch Affirms Leucadia's Long-Term IDR at 'BBB-'; Outlook Stable', March 6,
2014;

--'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)

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Contact:

Fitch Ratings
Ilya Ivashkov, CFA
Senior Director
+1-212-908-0769
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
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