NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Leucadia National Corp.'s (Leucadia) long-term Issuer Default Rating (IDR) at 'BBB-'. The Rating Outlook remains Stable. See the full list of ratings at the end of this press release.
The ratings of Leucadia and its main operating subsidiary, Jefferies Group LLC (Jefferies), continue to be equalized, as Jefferies is considered a core subsidiary under Fitch's criteria 'Rating FI Subsidiaries and Holding Companies'. This is based on Jefferies' significance relative to Leucadia's equity and the likely role it will play in the combined company's future strategic direction. Fitch has also affirmed Jefferies' ratings with a Stable Outlook today.
KEY RATING DRIVERS
The affirmation of Leucadia's rating reflects its strong liquidity position, modest leverage and measured deployment of capital generated from recent asset sales. The company continues to adhere to the operating parameters specified at the time of the merger, with the exception of a temporary increase in stressed leverage, as discussed below. Fitch continues to assess Leucadia's strategic direction and investment approach under the new management team, which are both at early stages of their implementation.
Leucadia has sold a number of its investments over the past two years, bolstering liquidity, and will eventually reinvest a portion of this capital. The dispositions have generally resulted in gains, particularly for larger assets such as Fortescue Metals Group. It is not yet clear how Leucadia plans to deploy the capital freed up from recent asset sales and recent debt issuance. Asset management and natural resource projects have been highlighted as potential areas of focus. Compared to historical activity, Fitch expects future investments to be characterized by smaller size, greater liquidity and improved diversity. Ownership of Jefferies may offer additional opportunities for Leucadia to act in a merchant banking role.
The company continues to maintain a conservative capital structure. Parent-only debt-to-stressed equity (excluding the two largest investments and the deferred tax asset) increased to 0.67x at Dec. 31, 2013 from 0.27x at Sept. 30, 2013. The increase was driven by the issuance of $1 billion in long-term senior unsecured debt in October 2013, including a $750 million 10-year tranche and a $250 million 30-year tranche. Fitch views the increase in leverage as temporary and expects the ratio to decline below the 0.50x operating parameter within the next 18-24 months, as the company repays maturing debt and accumulates retained earnings. Furthermore, Leucadia is expected to remain in compliance with all of its other operating parameters.
As a result of the recent sale activity, holding company liquidity is at an all-time high. As of Dec. 31, 2013, the company had $3.1 billion in cash and available-for-sale investments, a substantial majority of which was comprised of cash and U.S. government and agency securities. As mentioned above, Fitch expects a portion of this liquidity to be deployed into new investments over the intermediate term.
Succession issues that historically constrained Leucadia's ratings have been alleviated with Richard Handler and Brian Friedman taking key leadership positions. Key man risk continues to be a concern for both Leucadia and Jefferies, although Fitch recognizes that Jefferies has broadened and deepened its bench over the past several years.
Potential positive rating drivers for Leucadia would include greater clarity regarding the firm's strategic objectives and eventual execution of those objectives, particularly with respect to the deployment of its excess capital. Furthermore, a demonstrated commitment to a conservative liquidity profile, limited investment concentrations and reduced leverage at the parent company would also be considered positive drivers. For Jefferies, continued improvement in profitability and compensation cost containment would contribute to positive rating momentum over time. Fitch continues to monitor the interaction between Leucadia and Jefferies, which will play an important role in the longer-term value and risk profile of the combined franchise.
Jefferies' and Leucadia's ratings could be negatively impacted by a material increase in leverage or a less conservative liquidity and/or funding profile at either entity. Jefferies' leverage remains at historically low levels and Fitch expects that over time, if markets remain stable, it may increase modestly. Ratings would also be negatively impacted if Fitch perceives the risks taken in Leucadia's investment portfolio as increasing materially from current levels. Fitch will continue to assess the ability of Jefferies' management team to run both companies effectively. Furthermore, the unanticipated departure of key executives at either Jefferies or Leucadia could result in negative actions.
Leucadia operates its business similarly to a closed-end alternative fund and serves as the holding company for Jefferies. As of Dec. 31, 2013, it had roughly $47.9 billion in consolidated assets and $10.1 billion in book equity. In addition to Jefferies, Leucadia's portfolio includes significant equity stakes in other private and public companies as well as Treasuries and other fixed income securities.
Fitch has affirmed the following ratings:
Leucadia National Corp.
--Long-term IDR 'BBB-', Outlook Stable;
--Senior unsecured debt 'BBB-';
--Senior Subordinated debt 'BB+';
--$125 million cumulative convertible preferred 'BB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);
--'Securities Firms Criteria' (Jan. 31, 2014);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2013);
--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (Dec. 23, 2013);
--'Fitch Affirms Jefferies' 'BBB-/F3' Long- and Short-Term IDRs; Outlook Stable' (March 6, 2014).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Securities Firms Criteria
Rating FI Subsidiaries and Holding Companies
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis