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Related Issuers
Rating Action:

Moody's downgrades Jefferies to Baa3

Global Credit Research - 16 Oct 2012

Outlook stable

New York, October 16, 2012 -- On October 16 Moody's downgraded the senior ratings of Jefferies Group Inc to Baa3 from Baa2. The outlook on all of the firm's ratings is stable. This concludes a review for downgrade commenced on September 10, 2012.

RATINGS RATIONALE

The downgrade of Jefferies' senior unsecured rating to Baa3 reflects Moody's concerns regarding the challenges Jefferies faces in preserving its risk management culture and managing risk concentrations, and better incorporates risks presented by institutional capital markets activities and the challenges of operating the investment banking model. These business model challenges are some of the factors that led Moody's to downgrade the unsupported baseline credit assessments of many global investment banks into the Baa range in June 2012.

Moody's believes that concentration risks are inherent in the capital markets business and can arise either through important banking relationships or through competitive pressures. Preserving a firm's risk management culture through periods of opportunistic growth is particularly challenging, the rating agency noted.

Since the onset of the financial crisis in 2007, Jefferies has grown significantly and opportunistically, gaining market share in investment banking and diversifying its fixed income platform. As a result, Jefferies relative competitive position has improved. However, this growth also introduces risks as the firm integrates the people and operations that it has acquired, and establishes long-term discipline around risk taking. Being a mid-sized firm has enabled Jefferies' most senior management to remain highly engaged in this process, and this is positive. However, in Moody's view it also points to key-people risk. As the firm continues on its growth path, the ability of its senior leaders to remain as highly involved will diminish, and this longer-term risk is incorporated into the firm's ratings.

Positively, to date Jefferies has generally managed its financial position and risk taking well. The firm has kept leverage down, avoided costly acquisitions and has generally shied away from illiquid, concentrated positions. This approach has resulted in a more liquid, less complex balance sheet than many of its larger competitors, and has allowed Jefferies to steer clear of the large market and credit losses that have plagued many of those firms. The Baa3 rating reflects the firm's disciplined execution of its growth and diversification strategy over many years and through various market cycles.

Moody's observed that like all investment banks active in secondary capital markets, Jefferies is confidence-sensitive and this is a central risk facing the firm. Jefferies has a comprehensive approach to managing this risk. The key pillars of this approach are keeping balance sheet leverage low while avoiding illiquid assets, as well as maintaining a structural liquidity surplus and substantial liquidity pool. These attributes are key factors supporting the Baa3 rating.

The principal methodology used in this rating was Global Securities Industry Methodology published in December 2006. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following : parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Peter E Nerby
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Franklyn Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Jefferies to Baa3
No Related Data.

 

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