Nov 12 - Fitch Ratings has placed Jefferies Group, Inc.'s
(Jefferies) long-term Issuer Default Rating (IDR) and short-term IDR on Rating
Watch Negative. A full list of rating actions follows at the end of this press
Today's action follows Jefferies' announcement that it has entered into a
definitive agreement to merge with Leucadia National Corp. (Leucadia;
'BB'/Rating Watch Positive). Fitch expects to resolve the Rating Watch Negative
once the merger is completed in the first quarter of 2013. Assuming the
transaction is completed, and absent material credit developments in the
interim, the outcome is expected to result in a one-notch downgrade of
Jefferies' long-term IDR to 'BBB-' and short-term IDR to 'F3'.
The expected one-notch downgrade reflects Fitch's view that after the proposed
merger, Jefferies would become much more exposed to the market risk inherent in
the other subsidiaries' investments at Leucadia. Conversely, becoming a
privately-owned company may help insulate Jefferies from external market
pressures similar to those experienced in November 2011 Fitch believes that
management's interest would generally be aligned between Leucadia and Jefferies.
Under Fitch's criteria 'Rating FI Subsidiaries and Holding Companies', Jefferies
would be considered a core subsidiary based on its significance relative to
Leucadia's equity and the likely role it will play in the combined company's
future strategic direction. Key executive management will be shared by both
firms although each will retain a separate Board of Directors. Fitch believes
that management has discretion to move capital between Jefferies and Leucadia,
although that is not expected under normal market conditions.
Fitch would not expect Jefferies' core business strategies and operations to be
materially impacted by the proposed ownership change, although management's
ability to balance time demands between Jefferies and Leucadia would be an
important consideration. Fitch's rating view also incorporates an assumption
that Jefferies would continue to maintain its current liquidity, leverage and
enhanced funding profile post-transaction.
Converting to private ownership and becoming a direct subsidiary of Leucadia is
expected to provide several tangible financial benefits to Jefferies. For
example, it would allow Jefferies to terminate the dividends on its common
stock, which total approximately $60 million per year. Furthermore, Jefferies
would no longer be required to make minority interest distributions to Jefferies
High Yield Holdings, which have totaled $110 million over the last three fiscal
years. Finally, Leucadia also will have the ability to limit Jefferies' Federal
income tax distributions by utilizing the $4.7 billion of net operating losses
available at Leucadia.
Post-merger, Jefferies' and Leucadia's long-term IDRs are expected to be
equalized at 'BBB-'. Given the ratings linkage, material changes in either
entities' credit profile will have an impact on their ratings. The 'BBB-' rating
would reflect the proposed operating parameters articulated by Jefferies and
Leucadia management, including:
--Maintaining Leucadia's debt-to-equity ratio below 0.5x, assuming Leucadia's
two largest investments are fully impaired and the DTA is excluded from the
--Maintaining Leucadia's ratio of minimum liquid assets to parent company debt
--Maintaining Leucadia's minimum cash and equivalents of at least 10% of book
value (excluding Jefferies); and
--Limiting Leucadia's single largest investment to 20% of book value with all
other investments limited to 10% of book value (both excluding Jefferies).
Rating Drivers and Sensitivities
Positive rating drivers over the longer-term would include Leucadia's
demonstrated commitment to a conservative liquidity profile, limited investment
concentrations and reduced leverage at the parent company as well as maintenance
or improvement of Jefferies' current credit profile. The interaction between
Jefferies and Leucadia will 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 impacted by an increase in
leverage, a less conservative liquidity or funding profile or more aggressive
growth strategy at either entity. 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,
unanticipated departure of key executives at either Jefferies or Leucadia could
result in negative actions.
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 Aug. 31, 2012, Jefferies had
U.S. GAAP total assets of $34.4 billion and shareholders' equity of $3.4 billion
(including non-controlling interests).
Fitch has placed the following ratings for Jefferies Group, Inc. on Rating Watch
--Long-term IDR 'BBB';
--Short-term IDR 'F2';
--Senior unsecured debt 'BBB';
--Short-term debt 'F2';
--Subordinated debt 'BB+'.