March 18, 2014 / 2:05 PM / in 4 years

Fitch: Jefferies' 1Q'14 Results Show Continued Momentum

(The following statement was released by the rating agency) NEW YORK, March 18 (Fitch) Jefferies Group LLC (Jefferies) today reported its second consecutive quarter of strong financial results, driven by robust performance in both its trading and investment banking segments. Fitch affirmed Jefferies' ratings at 'BBB-/F3' on March 6, 2014, reflecting these performance trends as well as consistent operating strategy and execution following the merger with Leucadia National Corp. in March 2013. For additional details please see 'Fitch Affirms Jefferies' Long- and Short-Term IDRs at 'BBB-/F3'; Outlook Stable' available at www.fitchratings.com. Quarterly core net revenues of $912 million (excluding a mark-to-market loss of $13 million on holdings of Harbinger Group, Inc. and KCG Holdings ) were at a record level, up 8.7% from the prior quarter and 16.6% year-over-year. The linked-quarter improvement was driven primarily by a 26% increase in fixed income trading revenues, as well as continued strength in debt capital markets (DCM) and M&A advisory. These gains were partially offset by weaker activity levels in equity capital markets (ECM), which was down 20% from 4Q'13. The DCM business, which had a record quarter, could soften in 2014, particularly if interest rates start to rise more sharply. Furthermore, a rapid increase in interest rates could result in mark-to-market losses on Jefferies' inventory, as it did in 3Q'13. Several larger securities firms have recently made public comments about potential pressure on their 1Q'14 fixed income trading revenues. While this trend was not reflected in Jefferies' results, Fitch believes that the firm's product mix and unique reporting periods make it difficult to draw parallels to competitors' performance. Jefferies' investment banking segment, which includes ECM, DCM and advisory, continued to benefit from better market conditions. Over the past few years, the firm has made a significant number of strategic hires in this segment, primarily from its larger peers. This has allowed Jefferies to build new client relationships and grow its share of wallet with existing clients. Given the fee-driven nature of the business, Fitch generally considers investment banking to be a lower-risk business than sales and trading, and its growing share of total net revenues is viewed positively. However, it is important to note that Jefferies supports the investment banking business through Jefferies Finance LLC (JFIN), its 50% middle-market lending joint venture with Babson Capital Management LLC and Massachusetts Mutual Life Insurance Company. As of Nov. 30, 2013, JFIN had $3.3 billion in total assets, which is roughly double the balance as of Nov. 30, 2012. The firm increased its risk appetite modestly during the quarter, as evidenced by a larger balance sheet (up 8% from prior quarter and 15% year-over-year) and higher firm-wide value-at-risk (VAR). Adjusted net leverage (net assets divided by tangible equity) increased to 10.7x as of Feb. 28, 2014 from 10.0x as of Nov. 30, 2013. Fitch continues to view Jefferies' leverage and VAR levels as relatively conservative. There was a decrease in the liquidity buffer, which tends to be seasonally low during the first quarter as a result of cash bonus payments. The company's recent settlement with the SEC and U.S. Attorney for the District of Connecticut related to trading of residential mortgage bonds, and the associated $25 million payment, is viewed as credit neutral by Fitch. 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 Feb. 28, 2014, Jefferies had U.S. GAAP total assets of $43.4 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. Contact: Ilya Ivashkov, CFA Senior Director +1-212-908-0769 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Tara Kriss Senior Director +1-212-908-0369 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Fitch Affirms Jefferies' Long- and Short-Term IDRs at 'BBB-/F3'; Outlook Stable', March 6, 2014; --'Fitch Affirms Leucadia's Long-Term IDR at 'BBB-'; Outlook Stable', March 6, 2014; --'2014 Outlook: U.S. Securities Firms', Nov. 21, 2013. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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