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
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and whose ratings may change as a result of this credit rating action,
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Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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Regulatory disclosures contained in this press release apply to the credit
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review.
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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,
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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
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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.
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