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Rating Action:

Moody's upgrades Jefferies (senior debt to Baa2 from Baa3) and its subsidiaries, outlook stable

10 Nov 2021

New York, November 10, 2021 -- Moody's Investors Service ("Moody's") has upgraded all ratings of Jefferies Financial Group (Jefferies) (senior debt to Baa2 from Baa3) and its wholly-owned subsidiaries, including Jefferies Group LLC (senior debt to Baa2 from Baa3). The outlook for each respective entity has been changed to stable from positive.

RATINGS RATIONALE

The upgrades reflect Jefferies' management's consistent execution to expand and diversify its investment banking capabilities, to observe prudent leverage and liquidity disciplines and to reduce the size of and concentrations within its merchant banking portfolio. Steadfast adherence to this strategy allowed Jefferies to prosper in 2020, gaining investment banking market share and reporting net income of $1.3 billion in the first nine months, as broad fiscal and monetary policy actions continues to support primary and secondary capital markets.

For the past twenty years, Jefferies' CEO and its President have each been instrumental to the design and execution of Jefferies' strategy and successfully navigating market cycles. A recent example of this ingenuity and foresight is the strategic alliance between Jefferies and Sumitomo Mitsui Financial Group, Inc. (SMFG, A1 stable) that is also providing financing to Jefferies Finance LLC (JFIN, Ba3 positive). Jefferies and SMFG are coordinating their efforts in the US leveraged finance markets and expanding their offerings in cross-border M&A and capital markets.

The CEO and the President have also instilled an entrepreneurial but risk-aware culture within the expanding and evolving firm. Jefferies bondholders benefit from the risk management expertise of the CEO and the President and yet are exposed to key person risk, should either depart. As the firm has broadened the scale of its capital markets franchises, this key person risk will remain present. As the firm grows management and the board will need to continue to place a high emphasis on deepening and strengthening the leadership pipeline of the firm, the rating agency said.

Bondholders have also benefitted from Jefferies' straightforward business model and transparent balance sheet. Maintaining these attributes as the firm continues to grow will be key to maintaining its improved creditworthiness, Moody's said.

Although capital markets have been robust, they remain inherently cyclical and Jefferies faces an uncertain operating environment in 2022. Moody's expects the G-20 economies to grow 4.4% in 2022. Nevertheless, fiscal and monetary conditions are expected to tighten as central banks shift from an accommodative posture to a more neutral stance. The pandemic also remains a high source of forecast uncertainty. Another risk to the economic outlook is the continuation of existing supply chain disruptions, persistent labor market shortages and resulting supply side inflation pressures. The threat of accelerating inflation could spur central banks to raise interest rates faster and earlier than expected. If these downside risks materialize, this may affect Jefferies' profitability through revenue reductions as primary and secondary capital markets slow from current elevated levels, or markdowns are incurred on underwriting, trading, and merchant banking positions. Jefferies resiliency to stress was an important factor in the upgrades. Moody's scenario analysis indicates that the firm's balance sheet and capital base is positioned to absorb these impacts due to the increased diversification of Jefferies investment banking capabilities, its compensation expense flexibility and its reduced merchant banking concentrations. Over the past eight years, the firm has reduced the size and concentrations of its merchant banking portfolio as a percentage of tangible common equity and Moody's expects this trend to continue, with only infrequent and more granular new investments. The merchant banking portfolio now has a book value of $1.9 billion or 23% of tangible common equity as of 31 August 2021. Underwriting commitments and portfolio concentrations are also judiciously managed at JFIN.

Jefferies continues to maintain a comprehensive set of liquidity management practices that underpin the upgrades. These include a $13.6 billion tangible capital base at 31 August 2021, modest amounts of illiquid "level three" trading assets, substantial term in its repo book for less liquid collateral, and a $9.5 billion pool of cash and unencumbered securities to finance potential incremental liquidity requirements from clearing houses and counterparties.

The issuer ratings of three operating subsidiaries were also upgraded to Baa1 from Baa2 -- these operating subsidiaries being Jefferies LLC (Jefferies' principal US broker-dealer), Jefferies International Limited and Jefferies GmbH. In the case of Jefferies LLC, the upgrade reflects the structural seniority of the entity within the corporate family. The ratings of Jefferies International Limited and Jefferies GmbH reflect their seniority as operating entities as well as a very high likelihood of support from the group overall.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings of Jefferies could be upgraded if its business model continues to evolve and earnings become less dependent on the capital markets cycle and more stable over time - through a shift to a more granular risk profile and through the development of a substantial recurring earnings stream of low capital intensity. Additionally, given the importance to the firm's creditworthiness of the contributions from its existing CEO and its President, an upgrade would likely be dependent upon clarity on the firm's longer-term leadership structure, and there being a strong demonstration that its culture and strategic and financial policies would be sustained after a leadership transition.

The ratings of Jefferies could be downgraded if losses indicative of risk control failures occur, or if it should engage in concentrated risk-taking or relaxes its leverage and liquidity policies A deviation from liquidity guidelines or a material increase in double leverage could pressure the ratings of Jefferies Financial Group, compared to Jefferies Group LLC.

The principal methodology used in these ratings was Securities Industry Market Makers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187332. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

A complete list of rating upgrades and outlook changes follows below.

..Issuer: Jefferies Financial Group

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa2 from Baa3

..Issuer: Jefferies Group LLC

....LT Issuer Rating, Upgraded to Baa2 from Baa3

....Senior Unsecured Medium-Term Note Program, Upgraded to (P)Baa2 from (P)Baa3

....Pref. Stock, Upgraded to Ba1 (hyb) from Ba2(hyb)

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa2 from Baa3

....Senior Unsecured Shelf, Upgraded to (P)Baa2 from (P)Baa3

..Issuer: Jefferies International Limited

....LT Issuer Rating, Upgraded to Baa1 from Baa2

..Issuer: Jefferies LLC

....LT Issuer Rating, Upgraded to Baa1 from Baa2

..Issuer: Jefferies GmbH

....LT Issuer Rating, Upgraded to Baa1 from Baa2

Outlook Actions:

..Issuer: Jefferies Financial Group

....Outlook, Changed to Stable from Positive

..Issuer: Jefferies Group LLC

....Outlook, Changed to Stable from Positive

..Issuer: Jefferies International Limited

....Outlook, Changed to Stable from Positive

..Issuer: Jefferies LLC

....Outlook, Changed to Stable from Positive

..Issuer: Jefferies GmbH

....Outlook, Changed to Stable from Positive

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, 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 issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit 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: 1 212 553 0376
Client Service: 1 212 553 1653

Donald Robertson
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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