Jefferies Bond Revenue Falls 33%, Ending Four-Quarter Streak

Updated on
  • Drop was bigger than rivals expect to report in July
  • Equities business, investment banking show increases

Jefferies Group posted a 33 percent drop in quarterly bond-trading revenue, signaling weakness in a business that’s been a strength for Wall Street in the past year. Investment banking jumped on gains in debt underwriting.

Fixed-income revenue in the fiscal second quarter ended May 31 fell to $158.6 million, the New York-based company said Tuesday in a statement. The decline snapped a four-quarter streak of increases. Total trading declined 6.9 percent to $430.1 million.

Richard Handler

Photographer: Peter Foley/Bloomberg

“Lower volumes and lower volatility prevailed throughout much of the quarter,” Chief Executive Officer Richard Handler and Brian Friedman, chairman of the executive committee, said in the statement.

The U.K.’s exit from the European Union and Donald Trump’s surprise election win had been fueling wagers on corporate bonds and the direction of interest rates over the past year, boosting Wall Street results. Those types of stimulants have been scarcer in recent months.

Investors closely watch Jefferies for clues about how bigger investment banks might fare when they report results for quarters that end a month later. The firm’s fixed-income decline was more severe than several Wall Street competitors projected for their results, which will be announced in July. JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. said trading would drop at least 10 percent, with fixed-income the main culprit.

Goldman’s Waldron

“Our business is much different from Jefferies in many respects,” John Waldron, co-head of investment banking at Goldman Sachs Group Inc., said Tuesday in an interview on Bloomberg Television. “It’s probably more global and obviously a larger scale.” Waldron agreed that debt underwriting is having a strong quarter.

John Waldron

Source: Goldman Sachs Group

Net income at Jefferies climbed about 30 percent to $69.8 million from a year earlier, according to the statement. Investment-banking revenue surged 39 percent to $351.9 million as the firm took in more fees for capital-markets transactions and dealmaking advice. Total revenue increased 8.3 percent to $779.3 million.

Fixed-income trading revenue at Jefferies, which is owned by Leucadia National Corp., had been rebounding after a series of weak quarters in late 2015 and early 2016. The firm had been rebuilding its trading operations, trimming some staff and adding others in key areas. Chris Kotowski, an analyst at Oppenheimer & Co., said fixed-income missed his estimate by more than $41 million.

The equities-trading business, where Jefferies has shuffled executives, jumped 21 percent to $271.5 million as the company booked a $96 million mark-to-market gain on the shares it owns of KCG Holdings Inc., the high-speed trading firm being acquired by Virtu Financial Inc. Jefferies increased its market share trading cash stocks during the fiscal quarter, the executives said in the statement. The firm beat Kotowski’s estimate for stock trading excluding equity holdings by $10.5 million.

The rest of Wall Street will probably also post “modestly” higher equity-trading revenue, aided by prime brokerage and corporate derivatives, Jason Goldberg, an analyst at Barclays Plc, said in an email.

Shares of Leucadia declined 2.9 percent to $25.48 at 12:57 p.m. in New York, the biggest drop in the 66-company S&P 500 Financials Index.

Underwriting Fees

Underwriting was a bright spot. In the second quarter, fees from helping companies issue new debt more than doubled to $125.8 million from a year earlier, while revenue for bringing new stocks to market rose 23 percent to $74.9 million.

Jefferies underwrote $750 million in corporate debt deals in the quarter, a 38 percent increase from a year earlier, according to data compiled by Bloomberg. Much of that was propelled by high-yield debt, a portion of the fixed-income market the bank has long relied upon for fees and trading commissions, the data show.

Compensation costs rose 8.5 percent to $450.5 million. Interest expense jumped 19 percent to $259.7 million and non-compensation expenses climbed 5.5 percent to $212.6 million on higher brokerage and clearing fees.

— With assistance by Jennifer Surane, Dakin Campbell, and Felice Maranz

(Updates with Goldman comment in sixth paragraph, Oppenheimer estimates starting in eighth.)
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