Jefferies Cuts Sovereign-Debt Holdings by Almost 50% for Five EU Nations

Jefferies Group Inc. (JEF) cut gross holdings in sovereign securities of Portugal, Italy, Ireland, Greece and Spain by almost 50 percent since last week’s close of trading to show how easily it can reduce funds at risk.

Jefferies lowered both long and short trading positions by about $1.1 billion, the New York-based firm said today in a statement. The move “resulted in no meaningful profit or loss on today’s trading activity or our remaining positions,” it said.

“We undertook this reduction in our holdings solely to demonstrate the liquid nature of this market-making trading book,” Chief Executive Officer Richard Handler and Executive Committee Chairman Brian Friedman said in the statement. “We will now resume our normal market-making activities and serve our clients around the world.”

Jefferies slumped 18 percent last week as Egan-Jones Ratings Co. downgraded the firm’s debt, citing large “sovereign obligations” relative to equity. The reductions announced today left Jefferies with net exposure to the nations’ sovereign debt of about $59 million, or 1.7 percent of shareholder equity, carrying “negligible market or credit risk,” Jefferies said.

The company’s stock jumped as much as 8.5 percent and was up 1.8 percent to $12.29 at 12:29 p.m. in New York. Bonds from Jefferies rose, with its $800 million of 5.125 percent senior unsecured notes maturing in April 2018 gaining 2.5 cents to 87.5 cents on the dollar with a yield of 7.62 percent at 12:17 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities fell as low as 78 cents on Nov. 3.

‘Fragile Times’

Jefferies has issued six statements since the start of last week detailing its investments in European sovereign debt. Broker-dealer MF Global Holdings Ltd. (MF), previously run by former New Jersey governor and Goldman Sachs Group Inc. co-Chairman Jon Corzine, filed for bankruptcy Oct. 31 after revealing a $6.3 billion bet on bonds of some of Europe’s most indebted nations, which prompted a credit rating downgrade.

“These are fragile times in the financial market and we decided the only way to conclusively dispel rumors, misinformation and misplaced concerns is with unprecedented transparency about internal information that is rarely, if ever, publicly disclosed,” Handler, 50, said in a Nov. 4 statement.

The disclosures haven’t changed Egan-Jones’s view.

Goldman More Leveraged

“The fundamental problems remain,” Sean Egan, the company’s president and founding principal, said today in a telephone interview. “The environment has changed drastically in the past week and a half and, in fact, remains fairly fragile as a result of many accounts of MF Global being frozen, thereby raising the risks” of investing in non-bank financial companies.

He also cited Jefferies’s 12.9-to-1 leverage ratio, which means the company holds $12.9 of assets for every $1 of shareholder equity, as a cause of concern. He said it was “apples to oranges” to compare that ratio with the 13.5-to-1 ratio at Goldman Sachs Group Inc. (GS) or the 12.6-to-1 ratio at JPMorgan Chase & Co.

“There’s no way that I could see that the U.S. government is going to allow Morgan Stanley, JPMorgan or any of these others, despite Dodd-Frank, to get into significant difficulty,” Egan said, referring to last year’s Dodd-Frank regulatory laws. “If you have a firm 15 times the size of the other, I don’t care if it has the same leverage, it still has a greater access to capital and the cost of capital is lower.”

Leucadia National Corp. (LUK), the firm’s biggest stockholder, bought 1 million shares for $11.84 each Nov. 3. The New York- based company followed with another purchase of 500,000 shares the next day for $11.35 each.

To contact the reporters on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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