Jefferies Group Inc. (JEF), the investment bank whose stock dropped in the wake of MF Global Holdings Ltd. (MF)’s bankruptcy, cut stakes in European debt again to fend off speculation about its financial strength.
“We have further reduced our total gross exposure to Greece, Ireland, Italy, Portugal and Spain by almost another 50 percent (for a total reduction of nearly 75 percent), and our net exposure remains insignificant at net short $134 million,” according to a letter posted on the New York-based firm’s website today. The stakes equal about 3.8 percent of shareholders’ equity, the company said.
Jefferies plunged more than 60 percent this year after MF Global’s $6.3 billion bet on European debt led to an Oct. 31 bankruptcy. The collapse froze client accounts at MF Global and spurred scrutiny of similar stakes at financial firms. Jefferies had already cut gross holdings on Nov. 7 in sovereign securities of the five nations by almost 50 percent.
The firm “has been barraged by a group of people maliciously spreading rumors, half-truths and outright lies through every means possible,” Chief Executive Officer Richard Handler and Brian Friedman, chairman of the executive committee, wrote in the letter. “While it may be necessary for us to continue to respond to these ill-conceived attacks, we fortunately can do so on a firm foundation and with confidence in our funding and business model.”
Shares of Jefferies rose 0.4 percent to $10.20 at 4:15 p.m. in New York trading, erasing a 5.5 percent decline even as the Standard & Poor’s 500 Index fell 1.9 percent. The firm’s fiscal fourth quarter ends Nov. 30, and results are expected to be “profitable and stronger than our third quarter,” according to the letter.
“I found it a very convincing rebuttal,” said Chris Kotowski, an analyst at Oppenheimer & Co. “Jefferies historically has been a very conservatively managed firm. That you would put them in the same bucket as MF Global again shows you that the market is gripped by hysteria.” He rates the shares “market perform.”
The firm repurchased $50 million of its bonds due in 2012 in the past few weeks, Handler wrote. The balance sheet is “highly liquid,” and Jefferies had more than $2.2 billion in cash, almost $1 billion of unpledged quality collateral and $1.7 billion undrawn from $1.95 billion in total lines of credit at the end of last week, according to the letter.
“As a new shareholder, I loved it,” said Jeffrey Bronchick, who manages about $320 million for Los Angeles-based Cove Street Capital LLC. “It’s nice to see in this day and age people taking off the gloves and hitting it.”
Jefferies came under renewed pressure on Nov. 2 when Egan- Jones Ratings Co. downgraded the investment bank’s debt, citing large “sovereign obligations” relative to equity and a “changed environment” following the collapse of MF Global. Egan-Jones said it would “prefer that Jefferies maintain a lower leverage” ratio.
Jefferies responded that it has been “operating successfully and profitably with similar leverage for years, including during the 2008-09 financial meltdown,” and that it expects its bonds “will return to historical levels as time passes and investors realize we are the same company today that we were before this assault began.”
Egan-Jones has reviewed today’s letter and expects to issue an update later this week, Sean Egan, the firm’s president and a founding principal, said today in an e-mail. “In our opinion the letter does not provide additional comfort regarding credit quality,” he wrote.
Bonds issued by Jefferies fell after the letter was posted. Its $550 million of 6.875 percent notes due in April 2021 declined 1.25 cents to 78.5 cents on the dollar at 11:13 a.m. in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The debt, which yields 10.5 percent, has dropped from 100.1 cents since October.
Goldman Sachs Group Inc. said it expects a “weak” fiscal fourth quarter for Jefferies, lowering its earnings per share estimate to 15 cents from 20 cents “as the banking environment was nearly dormant for the first two months of its quarter,” according to a note from Daniel Harris, an analyst at Goldman Sachs who maintained a “sell” rating on the shares.
Billionaire Warren Buffett, the chairman of Berkshire Hathaway Inc. (BRK/A) who has aided other Wall Street firms, said during a visit to Japan today that Jefferies isn’t on his radar because it would be too small. Buffett injected funds into Goldman Sachs Group Inc. and Bank of America Corp. after their shares plunged. Leucadia National Corp., the largest holder of Jefferies stock, has partnered with Buffett in other investment ventures.
“I don’t know anything specific about Jefferies,” said Buffett, who said he looks to put at least $1 billion into one investment. Jefferies has a market value of about $2 billion.
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