* Egan Jones threatens downgrade without capital raise
* Says Jefferies should also sell $5 bln in assets
* Shares off 1.2 percent
By Lauren Tara LaCapra
Nov 22 Jefferies Group Inc needs to
raise $1 billion in equity capital and sell $5 billion in
assets to avoid another downgrade by Egan Jones Rating Co, the
ratings agency said in a note on Tuesday.
In its report, Egan Jones said Jefferies' rating is
"unsustainable" because its debt-to-capital ratio, at over 90
percent, is much higher than other mid-size brokerage firms and
closer to the level of Goldman Sachs Group Inc and
Morgan Stanley , whose ratings and bond prices benefit
from higher perceived levels of government support.
"We will cut without a major deleveraging," the agency
A further cut to Egan Jones' current BBB- rating on
Jefferies would put the company's bonds in junk territory.
Other major ratings agencies rate Jefferies' long-term debt
at one notch above Egan Jones' current rating with a stable
outlook, according to spokesmen for Moody's, Standard & Poor's
and Fitch Ratings.
Egan Jones downgraded Jefferies to a hair above junk
shortly after the bankruptcy of competitor MF Global Holdings
Ltd on Oct. 31.
Egan Jones argued that Jefferies, like its competitor, was
over-exposed to European sovereign debt and too reliant on
short-term funding, contentions the company has since fought
strenuously to discredit.
Top Jefferies executives said in a letter on Monday, for
example, that Egan Jones' analysis did not factor in hedges
that reduced the bank's net exposure to bonds of Greece,
Ireland, Italy, Portugal and Spain.
The company also reduced its holdings of those bonds by
nearly 75 percent since early November, with a net short
position of $134 million as of Monday morning. It has also
taken the unusual step of releasing identification numbers for
the securities it holds in that portfolio as part of a
transparency campaign to shore up investor confidence.
Jefferies spokesman Richard Khaleel declined to comment
about the Egan Jones report on Tuesday, as well as a report on
the web site of Fox Business Network that suggested Jefferies
Chief Executive Richard Handler is considering selling the
business to a larger rival. The report was attributed to
Shares of the New York-based investment bank were down 1.2
percent to $10.08 in late afternoon trading. Jefferies' stock
has fallen 23 percent since MF Global's bankruptcy.