Fitch Affirms Jefferies' Long- and Short-Term IDRs at 'BBB-/F3'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Jefferies Group LLC's (Jefferies) long-term Issuer Default Rating (IDR) at 'BBB-' and its short-term IDR at 'F3'. The Rating Outlook remains Stable. See the full list of ratings at the end of this press release.

The ratings of Jefferies and its parent company, Leucadia National Corp (Leucadia), continue to be equalized, as Jefferies is considered a core subsidiary of Leucadia 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 Leucadia's ratings with a Stable Outlook today.

KEY RATING DRIVERS

The affirmation of Jefferies' ratings reflects the company's relatively conservative leverage and liquidity profile, established business franchise, solid risk management, and relatively limited growth appetite in recent periods. Fitch believes Jefferies has a strong niche in its core markets and continues to diversify its revenue mix. The firm's smaller relative size and limited systemic importance have allowed it to avoid some of the regulatory constraints affecting larger competitors. These strengths are counterbalanced by the firm's reliance on wholesale funding and fluctuations in the firm's earnings given its reliance on sales and trading and investment banking revenues, both of which tend to be market-dependent. Fitch views the cyclicality inherent in Jefferies' business model as a ratings constraint.

Jefferies has continued to maintain a relatively conservative balance sheet after its merger with Leucadia, amid fluctuating market conditions. Gross and net leverage remain below long-term historical trends and lower than larger securities firms. According to Fitch's calculations, adjusted net leverage was 9.9x as of Nov. 30, 2013 and remained fairly consistent during FY2013. Fitch expects that over time, as market conditions stabilize, the firm may manage its leverage to somewhat less conservative levels.

The company maintains an adequate liquidity position, which included $4.9 billion, or 12.1% of total assets, in cash & equivalents and other highly liquid securities, as of Nov. 30, 2013. While this ratio is lower relative to comparable metrics at higher-rated peers, Fitch considers it to be consistent with Jefferies' ratings. Fitch notes that Jefferies has no unsecured short-term debt; debt maturities over the next 12 months are manageable, including $250 million of senior notes maturing in June 2014 and a Jefferies Bache revolving facility in August 2014, which has $200 million outstanding as of Nov. 30, 2013.

Quarterly profitability has been volatile, but has generally held up much better on an annual basis. FY2013 profits were down from the prior year, mainly as a result of a challenging market environment during the second and third quarters. Full-year net revenues of $2.9 billion were virtually flat with the prior year, while net income of $241 million was down 14.5%. Compensation expense was down approximately 4.7% year-over-year, while non-comp expense was up 23.0%, primarily resulting from the merger with Leucadia. If markets remain stable in 2014, we would expect Jefferies' profitability to improve. There were a number of one-time merger-related expenses in 2013, and the firm's expanded franchise should benefit if market sentiment improves.

The firm has sizeable equity positions in KCG Holdings, Inc. (KCG), which was initially taken in August 2012, and Harbinger Group, Inc. (HRG), which was taken in September 2013. These two positions have also increased the average VaR, which totaled $12.6 million during 4Q'13, 42% of which was driven by KCG and HRG. Fitch believes VaR is likely to remain elevated until Jefferies reduces these investments. Fitch continues to view these investments as relatively large and opportunistic, but does not expect them to have any rating implications at the current levels. However, ratings could be affected if the company continues to add materially to these positions or take other large equity stakes.

Fitch believes that with the merger, interests are generally aligned between Leucadia and Jefferies, particularly now that the firms are managed by the same executives. As expected, Fitch has not seen any material impact on Jefferies' core business strategies and operations arising from the recent ownership change, although management's ability to balance time demands between Jefferies and Leucadia remains an important consideration.

RATING SENSITIVITIES

For Jefferies, positive rating drivers over the longer term include continued improvement and stability in profitability and compensation cost containment. Potential positive drivers specific to Leucadia 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. Demonstrated commitment to a conservative liquidity profile, limited investment concentrations and modest leverage at the holding company would also be considered positive drivers. The interaction between Jefferies and Leucadia will continue to play an important role in the longer-term value and risk profile of the combined franchise, in Fitch's view.

Jefferies' and Leucadia's ratings could be negatively pressured 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 affected 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 also result in negative actions.

Jefferies, a Delaware-incorporated holding company, is a well-established full-service investment banking and institutional securities firm primarily serving middle-market clients and investors. Its primary broker/dealer operating subsidiary, Jefferies LLC, holds the vast majority of the firm's consolidated assets and is regulated by the SEC. At Nov. 30, 2013, Jefferies had U.S. GAAP total assets of $40.2 billion and shareholders' equity of $5.4 billion (including non-controlling interests and $1.4 billion of goodwill from the recent merger). Fitch considers Jefferies to be a core subsidiary of Leucadia 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 affirmed the following ratings:

Jefferies Group LLC

--Long-term IDR at 'BBB-', Outlook Stable;

--Short-term IDR at 'F3';

--Senior unsecured debt at 'BBB-';

--Short-term debt at 'F3'.

Station Place Securitization Trust, Series 2012-1

--Senior secured notes at 'BBB-'.

Station Place Securitization Trust, Series 2013-1

--Senior secured notes at 'BBB-'.

Station Place Securitization Trust, Series 2013-2

--Senior secured notes at 'BBB-'.

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);

--'Fitch: Jefferies' Reports Strong 4Q'13 Results on Improvement Across Segments' (Dec. 17, 2013);

--'Fitch Affirms Leucadia's Long-Term IDR at 'BBB-'; Outlook Stable' (March 6, 2014).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Securities Firms Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732556

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822834

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Contacts

Fitch Ratings
Primary Analyst
Ilya Ivashkov, CFA, +1 212-908-0769
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Tara Kriss, +1 212-908-0369
Senior Director
or
Committee Chairperson
Nathan Flanders, +1 212-908-0827
Managing Director
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Ilya Ivashkov, CFA, +1 212-908-0769
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Tara Kriss, +1 212-908-0369
Senior Director
or
Committee Chairperson
Nathan Flanders, +1 212-908-0827
Managing Director
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com