TEXT-Fitch: Jefferies ratings unaffected by weak earnings
June 20 - Jefferies Group Inc. (Jefferies) reported weaker second quarter 2012 results due to a more challenging market environment, further reduction in M&A activity and certain one-time items. Generally, fixed income has maintained some of the momentum gained during 1Q12 and exceeded Fitch's expectations. However, the equities business remains challenged amid poor market conditions, which are likely to persist. Fitch's ratings already take into account some of the volatility inherent in Jefferies' business model and are unaffected by the reduction in second quarter earnings. Furthermore, the weaker revenues in 2Q12 were not unexpected given challenging market conditions, which have continued to persist into 3Q12, a seasonally slower quarter. Second quarter net revenues were down 8.8% from the prior quarter, driven primarily by lower fixed income trading and advisory fees, which were down 14% and 27% respectively. This was partially offset by debt capital markets revenues, which were stronger despite some spread widening during the quarter. Jefferies has also reduced its compensation expense by 5%, which further softened the impact to earnings. Nonrecurring charges reduced earnings by approximately $9 million during the quarter. The sharp reduction in advisory fees points to a further delay in M&A activity as many clients remain on the sidelines amid increasing uncertainty in global markets. Recent escalation in the Eurozone crisis is likely to have a very limited direct impact on Jefferies, which has reduced its overall exposure to Europe. However, uncertainty in Europe continues to weigh on revenues through reduced trading volumes and investment banking activities for Jefferies and its peers. Jefferies' balance sheet remained relatively flat from the prior quarter and leverage increased very modestly, but is down year-over-year. Jefferies, a Delaware-incorporated holding company, is a well-established full service investment bank and institutional securities firm primarily serving middle-market clients and investors. Its primary broker/dealer operating subsidiary, Jefferies & Company, Inc. holds the vast majority of the firm's consolidated assets and is regulated by the SEC. At May 31, 2012, Jefferies had U.S. GAAP total assets of $35.7 billion and shareholders' equity of $3.3 billion (including non-controlling interests). Contact: Primary Analyst Joo-Yung Lee Managing Director +1-212-908-0560 Fitch, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Ilya Ivashkov, CFA Director +1-212-908-0769 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: firstname.lastname@example.org.
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