Jefferies Group Inc., the New York investment bank that raised half a billion dollars in a bond sale, will plow ahead with expansion as earnings across Wall Street slide.
The firm, which boosted headcount 31 percent in less than two years, is still hiring “selectively” to build businesses ahead of an economic recovery, Chief Executive Officer Richard Handler, 49, said in an interview after yesterday’s sale. The funds will be used for growth and refinancing, he said.
“The hiring is a long-term strategic initiative,” he said. “You can’t just turn off the hiring” if markets slow, he said, adding that competition for talent is mounting.
Handler is taking advantage of borrowing costs at almost record lows, as the 48-year-old firm seeks to take business from the world’s largest investment banks in trading, underwriting and advising corporate takeovers. Goldman Sachs Group Inc. and Citigroup Inc. are among firms that reported drops in revenue in the third quarter as governments stiffen regulations in response to the worst economic contraction since the Great Depression.
“In 2008 and early 2009, we grew very aggressively while things were very tough,” said Handler. Now, “there’s a breadth to our company that we didn’t have before.”
Handler, who became CEO in 2001, scooped up talent as competitors cut staff in the aftermath of Lehman Brothers Holdings Inc.’s collapse in 2008. Its compensation costs were 59 percent of revenue in the third quarter, compared with 56 percent a year earlier. Its target is 55 percent to 58 percent.
Jefferies shares have increased 1.9 percent this year, compared with a 7.7 percent advance in the 24-company KBW Bank Index and 10.8 percent gain in the Standard & Poor’s 400 Financials Index of midcap companies in the industry. The company’s stock rose 9 cents, or 0.37 percent, to $24.18 today in New York composite trading.
Among investment-banking boutiques and firms serving mid-sized companies, Jefferies is the largest and most diversified by product, industry expertise and geographic reach, according to a Sept. 24 report by David Trone, a New York-based analyst at JMP Securities.
The bank has expanded from trading stocks and high-yield bonds into equity research, municipal debt, mortgage securities, investment-grade corporate bonds and prime brokerage. Investment banking provided almost half its revenue in the last quarter.
Jefferies’s staff jumped to 2,971 in August from 2,270 in December 2008 as larger banks scaled back, according to data compiled by Bloomberg. New York City shed 23,600 jobs in the period, state Labor Department data show. The firm has more than 600 employees in London and is expanding in Asia, Handler said.
The “evolution is quite typical of Wall Street’s long history -- big venerable firms collapse due to risk management failures, and an aggressive, opportunistic middle-market firm rises into the void and becomes part of the bulge,” Trone wrote.
“Pre-2008, it was probably difficult to expand because of all the competition,” said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management, who oversees $13 billion of fixed-income assets in Grand Rapids, Michigan. The industry turmoil offered “a lot of opportunities for an investment bank that wants to expand.”
As banks prepare for economic improvement, that’s changing, Handler said. “Competition is very keen for people once again,” he said.
Markets have become “much healthier” for Jefferies since the three months through August, he said. In September, he characterized those months as “painfully slow” for investment banks, helping drive down third-quarter net income 46 percent and revenue 23 percent from a year earlier. That compared with a 21 percent decline in investment-banking and trading revenue reported by the five largest U.S. securities firms.
Fixed-income trading volume reported by regulators was about 8.7 percent higher last month than July, according to analysts at Keefe, Bruyette & Woods. The Standard & Poor’s 500 Index climbed 14 percent from the end of August to Nov. 2. Registrations of new stock issues reached $24.2 billion in October, almost half the previous three months combined, according to KBW.
“People are getting back to everyday business,” said Handler. Jefferies is in the market now with six issues of high-yield bonds and bank loans for clients, he said. “We are enjoying a relatively positive environment right now, but you never know how long that is going to last.”
Low Borrowing Costs
Jefferies sold $500 million of 3.875 percent, 5-year notes yesterday in an offering that was boosted from $350 million, suggesting orders for bonds exceeded supply, according to data compiled by Bloomberg. In June, it sold $550 million of 6.875 percent debt maturing in April 2021, also slated for business development and diversification.
Average borrowing costs for investment-grade companies fell to 3.61 percent yesterday, according to Bank of America Merrill Lynch’s U.S. Corporate Master index. That’s near the 3.56 percent on Oct. 8, the lowest yield since the index was made available in October 1986.
This week’s offering “gives us flexibility to continue to build, and it is a good source for refinancing existing debt,” said Handler. “It is really a combination.”
The firm must control costs while integrating new hires and business lines, said Jeff Harte, a Chicago-based analyst for Sandler O’Neill & Partners LP, who has a “hold” on the stock.
“History would suggest that they’ll get the revenues out of the employees they are bringing in,” Harte said. “But that is part of the work to be done.”
Growth ‘May Slow’
Last year, the firm hired Ben Lorello from UBS AG as global head of investment banking and capital markets. It’s adding managing directors in the U.S. and Europe, including sector group heads, the firm’s executive committee chairman, Brian Friedman, said Sept. 22. In 2011, it aims to build on equity and fixed-income platforms established this year in Asia, he said.
Jefferies said yesterday it hired Douglas Wendell from Citigroup as a managing director in the technology investment-banking group. Last month, the firm said it hired William S. Newby from UBS as global head of gaming investment banking.
The expansion “may slow, only because the pronounced weakness of some of the bigger players in the market is less than it was,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees more than $65 billion.