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Fitch Affirms Leucadia at 'BBB-'; Outlook Stable
February 27, 2017 / 8:33 PM / 7 months ago

Fitch Affirms Leucadia at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, February 27 (Fitch) Fitch Ratings has affirmed Leucadia National Corporation's (Leucadia) Long-term Issuer Default Rating (IDR) at 'BBB-'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release. Fitch has also affirmed the ratings of Leucadia's wholly-owned subsidiary, Jefferies Group LLC (Jefferies), today. The Rating Outlook is Stable. For more information, see 'Fitch Affirms Jefferies at 'BBB-/F3'; Outlook Stable' dated Feb. 27, 2017. KEY RATING DRIVERS - IDRS, SENIOR DEBT AND HYBRID SECURITIES The ratings for Leucadia and its main operating subsidiary, Jefferies, continue to be equalized, as Fitch considers Jefferies a core subsidiary of Leucadia. This is based on Jefferies' significance relative to Leucadia's balance sheet (Jefferies accounted for 46.2% of Leucadia's tangible capital as of Dec. 31, 2016), shared leadership between the two companies, and the likely role Jefferies will play in Leucadia's future strategic direction. Leucadia's credit strengths include its low balance sheet leverage; long-dated debt maturity profile; adequate liquidity; and maintenance of relatively conservative operating parameters articulated by management since the March 2013 merger with Jefferies. Ratings are constrained by the company's sizeable concentration in its three largest investments, Jefferies (wholly-owned), National Beef Packing Company, LLC (National Beef, 78.9% owned), and HRG Group, Inc. (HRG, IDR 'B'/Outlook Negative, 23% owned), which collectively accounted for 56.1% of the company's tangible capital as of Dec. 31, 2016. The rating further takes into account key man risk associated with Leucadia's management team, limited liquidity of the majority of Leucadia's investments and the potential for variable operating performance as measured by upstream dividend coverage of holding company interest expenses. Leucadia's strategic direction and investment approach continue to evolve but most investments are performing well. Fundamentals stabilized for Jefferies and National Beef in 2016 compared to 2015 and earnings stability should continue in 2017 given de-risking in Jefferies' fixed income business and increased availability of cattle at National Beef. During 2016, Jefferies results also reflected strong advisory revenue but weaker results in capital markets as market uncertainty, which abated somewhat over the course of the year, caused overall lower new issue volume. Fitch believes that securities firms likely benefited from an increase in market activity across all products in the fourth quarter following the U.S. election. Separately, with respect to National Beef, the U.S. Department of Agriculture projects moderate per capita beef consumption increases and lower nominal prices for beef cattle as production rises through 2026, according to a Feb. 16, 2017 report. These trends should drive earnings and cash flow growth for National Beef in Fitch's view. Leucadia completed several opportunistic transactions over the past 12 months, although they did not materially alter the overall composition of Leucadia's financial services and merchant banking investments. In May 2016, through a series of transactions, Leucadia acquired a 94% interest in M Science for $12 million from Investment Technology Group. In September 2016, Leucadia and FXCM Inc. entered into a long-term partnership agreement that extended the maturity of Leucadia's $192.5 million senior secured term loan to FXCM by one year to January 2018 and gave Leucadia a 49.9% common membership interest in FXCM's operating entity and up to 65% of its cash flow. Most recently, in December 2016, Leucadia agreed to sell 100% of Conwed Plastics to Schweitzer-Mauduit International, Inc. for $295 million in cash plus potential earn-out payments. The company also continued to broaden its asset management platform in 2016, with Lake Hill, an electronic trader in listed options and futures across asset classes, and Tenacis Capital, a systematic macro investment platform. The company continues to maintain a conservative capital structure and funding profile. Leverage, measured as parent company debt and preferred stock to tangible common equity was 0.15x as of Dec. 31, 2016, basically flat compared to 0.14x as of Dec. 31, 2015 and down from 0.21x as of Dec. 31, 2014. Fitch anticipates that this ratio will remain between 0.10x and 0.20x in the near to intermediate term as the company continues to build equity via retained earnings and given that Leucadia has no near-term need for parent company debt issuance since the next Leucadia debt maturity is in October 2023. Leucadia targets a maximum parent debt to equity ratio of less than 0.50x in a stressed scenario, which assumes a 100% loss on Leucadia' two largest investments excluding Jefferies. This ratio was 0.27x as of Dec. 31, 2016. Since the 0.50x threshold is a self-imposed operating parameter by Leucadia, temporary breaches of the metric do not, in and of themselves, impact Fitch's ratings. As a result of continued investment activity, liquidity has declined from all-time-high levels recorded in 2013, but is still adequate in the context of the parent company's debt levels and holding company expenses. Liquidity, defined as cash, available-for-sale investments, and certain other investments that are easily convertible into cash measured $543.5 million at Dec. 31, 2016, down from $613.8 million as of Dec. 31, 2015 and $2.1 billion as of Dec. 31, 2014. Despite reduced liquidity over the past two years, Leucadia's current liquidity levels exceed holding company cash operating expenses, parent company interest, and common and preferred dividends by 1.3x over the next 24 months, which is solid for the 'BBB-' rating. The nature of Leucadia's portfolio and the strategic focus on generating long-term investment returns versus earnings growth tends to dampen operating results and create variable overall operating cash flow. On a GAAP basis, the company generated consolidated net income of $125.9 million in 2016, compared to $279.6 million in 2015 and $204.3 million in 2014. The year-over-year decline in 2016 stemmed from reduced revenues from certain Jefferies business activities in early 2016 such as principal transactions and investment banking revenues and fair value adjustments to the FXCM investment. U.S. GAAP earnings do not fully reflect Leucadia's economic earnings because of the way Leucadia accounts for its investments, some of which are consolidated and some of which are reflected under the equity method. Moreover, certain investments that are consolidated do not necessarily generate upstream dividends that accrue directly to Leucadia. Upstream dividend coverage of holding company cash expenses comfortably exceeded 2.0x in 2016 and improved sequentially from 2013 to 2016, driven by distributions from both financial services and merchant banking investments. Fitch views coverage as solid when considered together with available holding company liquidity. Fitch expects this coverage ratio to improve in 2017 as distributions grow across certain subsidiaries and investments, notably National Beef. Key man risk continues to be a rating constraint for both Leucadia and Jefferies. The CEO of Leucadia also serves as Chairman of the Board and CEO of Jefferies, and the President of Leucadia is also the Chairman of the Executive Committee of Jefferies. These individuals continue to influence Leucadia's strategic direction and in some cases, source investment opportunities. Both Leucadia and Jefferies have broadened and deepened their benches over the past several years, which Fitch views favorably. The $125 million of 3.25% cumulative convertible preferred stock issued by Leucadia is notched down twice from the company's IDR. The two-notch differential from the IDR reflects that the preferred stock is subordinated to all senior debt and may be converted into common shares. Nevertheless, the preferred stock is not afforded equity credit by Fitch given that it has a fixed conversion rate and lacks a mandatory conversion feature. RATING SENSITIVITIES - IDRS, SENIOR DEBT AND HYBRID SECURITIES Potential positive rating drivers for Leucadia could include demonstrated performance of recent investments and reduced investment concentration, while maintaining a conservative liquidity and leverage profile. Ratings could be negatively affected by increased concentration of investments, a fundamental shift in financial policy related to parent company liquidity to parent company debt, a change in the company's strategy, and/or a less conservative leverage profile. Since the ratings of Leucadia and Jefferies are currently equalized due to the strong linkages between the two companies and the likely role Jefferies will play in Leucadia's future strategic direction, a change in Jefferies's ratings and/or Outlook would influence Leucadia's ratings and/or Outlook. The unanticipated departure of key executives at either Jefferies or Leucadia could result in negative rating pressure. The rating assigned to the preferred stock is sensitive to changes in Leucadia's IDR. Fitch has affirmed the following ratings: Leucadia National Corporation --Long-term IDR at 'BBB-'; Outlook Stable; --Senior unsecured debt at 'BBB-'; --Preferred stock at 'BB'. Contact: Primary Analyst Sean Pattap Senior Director +1-212-908-0642 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Michael Dodge Associate Director +1-212-908-0379 Committee Chairperson Doriana Gamboa Senior Director +1-212-908-0865 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1019791 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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