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Fitch Equalizes Jefferies' and Leucadia's L-T IDRs at 'BBB-' After Merger; Outlook Stable
March 7, 2013 / 5:58 PM / 5 years ago

Fitch Equalizes Jefferies' and Leucadia's L-T IDRs at 'BBB-' After Merger; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, March 07 (Fitch) Fitch Ratings has upgraded the long-term IDR of Leucadia National Corp. (Leucadia) to 'BBB-' from 'BB'. Concurrently, Fitch downgraded Jefferies Group LLC's (Jefferies) long-term Issuer Default Rating (IDR) and short-term IDR to 'BBB-' and 'F3', respectively, from 'BBB' and 'F2'. The Outlooks on all ratings are Stable. A full list of rating actions follows at the end of this press release. Today's rating actions follow the completion of the previously announced merger between Leucadia and Jefferies. The ratings of the two issuers have been equalized, as Jefferies is considered a core subsidiary of Leucadia under Fitch's criteria 'Rating FI Subsidiaries and Holding Companies'. This is based on Jefferies' significance relative to Leucadia's equity and the likely role it will play in the combined company's future strategic direction. Key executive management will be shared by both firms although each will retain a separate Board of Directors. Fitch believes that management has discretion to move capital between Jefferies and Leucadia, although that is not expected under normal market conditions. The ratings also reflect the operating parameters set out by Jefferies and Leucadia management, including: --Maintaining Leucadia's debt-to-equity ratio below 0.5x, assuming Leucadia's two largest investments are fully impaired and the DTA is excluded from the calculation; --Maintaining Leucadia's ratio of minimum liquid assets to parent company debt below 1.0x; --Maintaining Leucadia's minimum cash and equivalents (including short-term U.S. Government and Agency securities) of at least 10% of book value (excluding Jefferies); and --Limiting Leucadia's single largest investment to 20% of book value with all other investments limited to 10% of book value (both excluding Jefferies). KEY RATING DRIVERS - JEFFERIES In Fitch's view, Jefferies has become more exposed to the market risk inherent in the other subsidiaries' investments at Leucadia. Conversely, becoming a privately-owned company may help insulate Jefferies from external market pressures similar to those experienced in November 2011. Fitch believes that management's interest would generally be aligned between Leucadia and Jefferies, particularly now that the firms will be managed by Jefferies' CEO and President. Fitch would not expect Jefferies' core business strategies and operations to be materially impacted by the ownership change, although management's ability to balance time demands between Jefferies and Leucadia will be an important consideration. Fitch's rating view also incorporates an assumption that Jefferies will continue to maintain its current liquidity, leverage and funding profile post-transaction. The conversion to private ownership and becoming a direct subsidiary of Leucadia is expected to provide several tangible financial benefits to Jefferies. For example, it allows Jefferies to terminate the dividends on its common stock, which totaled approximately $60 million per year. Furthermore, Jefferies will no longer be required to make minority interest distributions to Jefferies High Yield Holdings, which have totaled $110 million over the last three fiscal years. Finally, Leucadia also will have the ability to limit Jefferies' Federal income tax distributions by utilizing the $4.7 billion of net operating losses available at Leucadia. KEY RATING DRIVERS - LEUCADIA The upgrade of Leucadia's rating reflects Leucadia's highly liquid and lowly leveraged balance sheet, which the new management team from Jefferies has represented that it is committed to maintaining. Additionally, a wholly owned Jefferies is expected to add value to Leucadia in terms of deal flow and expertise. Leucadia's ratings have been sensitive to succession issues in recent years. The recent management changes, with Joseph Steinberg remaining as Chairman and the introduction of the Jefferies executive management team, alleviates these concerns in the near to intermediate term. Key man risk continues to be an issue for Jefferies, although Fitch recognizes that the company has executed on a number of fronts to broaden and deepen its management team. RATING SENSITIVITIES Positive rating drivers over the longer-term would include Leucadia's demonstrated commitment to a conservative liquidity profile, limited investment concentrations and reduced leverage at the parent company. For Jefferies, continued improvement in profitability and compensation cost containment would contribute to positive rating momentum over time. The integration between Jefferies and Leucadia will play an important role in the longer-term value and risk profile of the combined franchise, in Fitch's view. Jefferies' and Leucadia's ratings could be negatively impacted by a material increase in leverage or a less conservative liquidity and/or funding profile at either entity. Jefferies' leverage remains at historically low levels and Fitch expects that over time, if markets remain stable, it may increase modestly. Ratings would also be negatively impacted if Fitch perceives the risks taken in Leucadia's investment portfolio as increasing materially from current levels. Fitch will continue to assess the ability of Jefferies' management team to run both companies effectively. Furthermore, the unanticipated departure of key executives at either Jefferies or Leucadia could result in negative actions. Jefferies, a Delaware-incorporated holding company, is a well-established full-service investment bank and institutional securities firm primarily serving middle-market clients and investors. Its primary broker/dealer operating subsidiary, Jefferies & Company, Inc., holds the vast majority of the firm's consolidated assets and is regulated by the SEC. At Nov. 30, 2012, Jefferies had U.S. GAAP total assets of $36.3 billion and shareholders' equity of $3.4 billion (including non-controlling interests). Leucudia is a holding company, which operates similarly to a closed-end alternative fund. It has roughly $9.3 billion in assets and $6.8 billion in book equity. The company has been managed by partners Ian Cumming and Joseph Steinberg since 1978. Fitch has downgraded the following ratings: Jefferies Group LLC --Long-term IDR to 'BBB-' from 'BBB'; Outlook Stable; --Short-term IDR to 'F3' from 'F2'; --Senior unsecured debt to 'BBB-' from 'BBB'; --Short-term debt to 'F3' from 'F2'; --Subordinated debt to 'BB' from 'BB+'. Station Place Securitization Trust, Series 2012-1 --Senior secured notes to 'BBB-' from 'BBB'. Station Place Securitization Trust, Series 2013-1 --Senior secured notes to 'BBB-' from 'BBB'. Fitch has upgraded the following ratings: Leucadia National Corp --Long-term IDR to 'BBB-' from 'BB'; Outlook Stable; --Senior unsecured debt to 'BBB-' from 'BB'; --Senior Subordinated debt to 'BB+' from 'BB-'. Leucadia's ratings have been removed from Rating Watch Positive. The ratings of Jefferies, Station Place Securitization Trust, series 2012-1 and Station Place Securitization Trust, series 2013-1 have been removed from Rating Watch Negative. Contact: Primary Analyst Joo-Yung Lee Managing Director +1-212-908-0560 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Ilya Ivashkov, CFA Director +1-212-908-0769 Committee Chairperson Nathan Flanders Managing Director +1-212-908-0827 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Global Financial Institutions Rating Criteria' (Aug. 15, 2012); --'Securities Firms Criteria' (Aug. 15, 2012); --'Investment Manager and Alternative Funds Criteria' (Dec. 17. 2012); --'Fitch: Jefferies Core Performance Improves on Fixed Income Activity' (Dec. 19, 2012). Applicable Criteria and Related Research Global Financial Institutions Rating Criteria here Securities Firms Criteria here Investment Manager and Alternative Funds Criteria here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

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