Fitch: Jefferies Reports Solid 3Q'14 Results on I-Bank Activity

Jefferies Group LLC (Jefferies) today reported solid third quarter 2014 (3Q'14) results, despite a seasonally slower summer period. The results represent a marked improvement from the prior year period, which was characterized by fixed income trading underperformance following Fed tapering comments. Meanwhile, the sequential improvement in net revenues was driven primarily by stronger activity levels in the firm's investment banking businesses. The most recent results support Jefferies' 'BBB-/F3' ratings, which were last affirmed by Fitch Ratings in March 2014.

Quarterly net revenues of $843 million were up 16.6% from 2Q'14 and 58.6% year-over-year (both periods include the mark-to-market impacts of holdings of KCG Holdings [KCG]). Mergers & Acquisitions Advisory (M&A) and Capital Markets revenues drove the improved performance, with respective net revenue increases of $98.5 million and $38.2 million from 2Q'14. Total Sales & Trading net revenues were down 7.1% from the linked quarter due primarily to a seasonal slowdown in client activity. Jefferies reported net income of $83.6 million, which was up considerably from the prior year period and from 2Q'14.

Jefferies' investment banking segment, which includes Equity Capital Markets, Debt Capital Markets and M&A continues to benefit from improved scale and robust market conditions. Over the past few years, the firm has made a significant number of strategic hires in this segment, primarily from its larger peers. This has allowed Jefferies to build new client relationships and grow its share of wallet with existing clients. Given the fee-driven nature of the business, Fitch generally considers investment banking to be a lower-risk business than sales and trading, and its growing share of total net revenues is viewed positively. It is important to note that Jefferies supports the investment banking business through Jefferies Finance LLC (JFIN), its 50% middle-market lending joint venture with Babson Capital Management LLC and Massachusetts Mutual Life Insurance Company.

The firm's risk appetite remains relatively conservative and consistent with recent levels. The balance sheet has continued to gradually increase, with total and average assets of $44.8 billion and $51.4 billion, respectively, at Aug. 31, 2014. These amounts represent respective increases of 15.3% and 12.1% from the prior year period. Adjusted net leverage (net assets divided by tangible equity) increased modestly to 10.6x as of Aug. 31, 2014 from 10.5x as of May 30, 2014. Jefferies' liquidity buffer of $5.9 billion represented 13.2% of assets, while cash and equivalents comprised 9% of assets. Both figures were virtually flat from the prior quarter.

Jefferies, a Delaware-incorporated holding company, is a full-service investment banking and institutional securities firm primarily serving middle-market clients and investors. Its primary broker/dealer operating subsidiary, Jefferies LLC, holds the vast majority of the firm's consolidated assets and is regulated by the SEC. At Aug. 31, 2014, Jefferies had U.S. GAAP total assets of $44.8 billion and shareholders' equity of $5.6 billion (including non-controlling interests and $2 billion of goodwill). Fitch considers Jefferies to be a core subsidiary of Leucadia based on Jefferies' significance relative to Leucadia's equity and the likely role it will play in the combined company's future strategic direction.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Fitch Affirms Jefferies' Long- and Short-Term IDRs at 'BBB-/F3'; Outlook Stable', March 6, 2014;

--'Fitch Affirms Leucadia's Long-Term IDR at 'BBB-'; Outlook Stable', March 6, 2014.

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Senior Director
Fitch Ratings, Inc.
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