Jefferies Group Inc. (JEF) bonds fell amid concern that smaller brokers may have a harder time raising funding after the collapse of MF Global Holdings Ltd.
Egan-Jones Ratings Co. cut Jefferies credit grade one level to BBB-, citing a “changed environment” after the collapse of MF Global and concern that its $2.7 billion in “sovereign obligations” on Aug. 31 is large relative to equity. Jefferies said in response it has no “meaningful net exposure” to European sovereign debt.
“The market sees another wholesale funded broker-dealer and is shooting first and asking questions later,” Lon Erickson, a money manager who helps oversee $9 billion of fixed-income assets at Thornburg Investment Management Inc. in Santa Fe, New Mexico, said in an e-mail.
Jefferies’s $800 million of 5.125 percent notes due in April 2018 declined 5.5 cents to 85.1 cents on the dollar at 1:47 p.m. in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The debt yields 8.2 percent, or 667 basis points more than similar-maturity Treasuries, Trace data show.
“Recent reports and calculations appear to have been focusing only on long inventory,” which amounted to $2.7 billion and doesn’t include hedges, New York-based Jefferies said in a statement. The firm has net short exposure to Portugal, Italy, Ireland, Greece, and Spain of about $38 million, or about 1 percent of shareholders’ equity, it said.
MF Global sought bankruptcy protection on Oct. 31 following downgrades to junk by Moody’s Investors Service and Fitch Ratings stemming in part from a $6.3 billion bet on the bonds of Europe’s most indebted nations.
“The abrupt failure of MF has made investors suddenly more aware of risk in the investment banking business, especially for firms that aren’t bank holding companies and that aren’t ‘too big to fail,’” Gimme Credit analyst Kathleen Shanley wrote in a note yesterday. The firm maintains a “stable” credit score on Jefferies, citing a lack of sovereign debt holdings and leverage ratio about half the size of MF Global’s.
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