Jefferies Group announces financial results for its fiscal first quarter 2016

NEW YORK, 16-Mar-2016 — /EuropaWire/ — Jefferies Group LLC today announced financial results for its fiscal first quarter 2016 and a summary of developments in its fiscal second quarter to date.

Highlights for the three months ended February 29, 2016:

• Investment Banking Net Revenues of $231 million
• Total Sales and Trading Net Revenues of $59 million
• Total Net Revenues of $299 million
• Net Loss of $167 million (tax rate 33.3%), primarily attributable to an approximately $90 million after-tax difference in results this year related to two listed equity block positions, including KCG, and our share of the results of our Jefferies Finance joint venture, as compared to our results from the same items for last year’s fiscal first quarter

Early indications for the three months ended May 31, 2016:

• Business conditions improved in late February and in the first half of March
• Total Sales and Trading Net Revenues for the first ten trading days are averaging above our recent periods’ mean results
• Investment Banking backlog is above recent levels
• We have recorded $18 million in markups so far this quarter in the two listed equity block positions, including KCG, mentioned above

Rich Handler, Chairman and Chief Executive Officer, and Brian Friedman, Chairman of the Executive Committee, commented: “Our overall first quarter results reflect an exceptionally volatile and turbulent market environment during our first fiscal quarter, although our core businesses performed reasonably, considering the environment.  A quiet December was followed by an extremely challenging January and first few weeks of February.  Almost every asset class, including equities and fixed income, suffered significantly amid concerns about the pace of global economic growth, outflows from the high yield market, forced selling from hedge funds, uncertainty over China, a potential Brexit, and an overall void in liquidity.  New issue equity and leveraged finance capital markets were virtually closed throughout January and February, which resulted in many of our potential Investment Banking capital markets transactions being postponed until some stability returns to the markets.  As we have done through many other turbulent periods in our history, we reduced our already smaller balance sheet to continue to reduce risk during this difficult period.   We are humbled by Jefferies’ quarterly loss and will strive to deliver the better results that our shareholders deserve and Jefferies is more than capable of achieving.

While we are early in the second quarter and one can never predict the future, it appears markets have not only stabilized, but aggressively snapped back.  Bank holding company stocks in the U.S. and globally have halted their sell-off, high yield inflows have been at record levels, hedge funds appear to have stabilized, equity markets have rebounded, and energy/commodity prices have improved significantly.  We are experiencing mark-ups in our block equity positions and believe there may be potential upside in the value of the loans held for sale in Jefferies Finance should the current market tone continue.  Our core businesses are performing well, with total sales and trading net revenues for the first ten trading days of our second quarter averaging above our recent periods’ mean results, and our investment banking backlog is stronger.

With our strong financial condition and solid operating franchise, as well as continuing developments among our competitors that favor our model, we are optimistic about Jefferies’ future.  The recent challenges, together with other issues that are unique to them, have been causing many of our primary competitors to adapt their business strategy, shrink aggressively, and focus on their other core operating businesses, such as retail and commercial banking.  We believe there is a significant long term-opportunity for Jefferies to be even more relevant and gain further market share in serving our clients.

Our core equity business performed reasonably well during the quarter, despite the challenging environment.  Although our Equities revenues declined to $2 million for the quarter from $203 million for the first quarter of 2015, this was primarily attributable to a $145 million difference in net revenues related to two listed equity block positions, including KCG, and our share of the results of our Jefferies Finance joint venture. The two equity block positions generated pre-tax, mark to market losses during the quarter that totaled $82 million, $67 million of which is unrealized, including KCG, which was written down by $37 million. This compares to the combined net revenues of the same positions of positive $30 million during the first quarter of 2015, a year-on-year decline of $112 million. In the first ten trading days of March, the same two positions have increased in value by $18 million, 22% of the first quarter’s markdowns.  Inception to date net revenues in respect of KCG is $259 million and a loss of $10 million for the other block position.  That position was reduced in size by 38% during the first quarter.

Our share of the results generated by our 50% corporate lending joint venture with Mass Mutual, Jefferies Finance, which is recorded in our Equity net revenues line, was a loss of $22 million for the first quarter of 2016, compared to positive net earnings of $11 million for the first quarter of 2015, a year-on-year decline of $33 million. Leverage lending activity and related liquidity was very muted during the quarter, and two loans Jefferies Finance closed during the quarter and held for sale as of the end of the quarter were marked down by a total of $38 million.  That is reflected in our share of Jefferies Finance’s results.  The two loans held for sale in Jefferies Finance as of the end of February 2016 were marked at prices believed to be required to clear their sale, with the potential for gains should markets improve prior to sell-down.  Jefferies Finance’s equity is $949 million.  Jefferies Finance is highly liquid and positioned well to serve our clients in this important business as the market recovers.  We recently strengthened our Leveraged Finance origination team and expect to grow further our presence in this segment.

Fixed Income net revenues for the first quarter were $57 million, an improvement over the $9 million recorded for last year’s fourth quarter, despite markdowns in less liquid positions. We expect continued improvement in our fixed income results in coming quarters.

Investment banking net revenues for the first quarter were $231 million, compared to $272 million for the first quarter of 2015, a decline of $41 million. This is substantially a result of Equity Capital Markets net revenues for the first quarter being $44 million versus $79 million for the comparable quarter in 2015, a reduction of $35 million. As equity prices fell during the quarter, a significant portion of equity capital markets activity was postponed to future periods.  Our second quarter backlog is solid.

Consistent with our strategy, our balance sheet, liquidity and key risk metrics ended the quarter at even more conservative levels than after we took aggressive actions in fourth quarter 2015.  Our balance sheet at February 29, 2016 was $35.2 billion, down $3.4 billion from 2015 year-end and $8.6 billion from the year ago period. We estimate period-end tangible leverage to be 9.8 times.  We continue to have ample excess liquidity. At the end of the first quarter our liquidity buffer was about $4.3 billion and represented 12.9% of gross tangible assets.  We repaid our $350 million March debt maturity today from cash on hand and have retired a net $784 million of debt in the last six months.  Our Level 3 assets decreased 10% to $489 million, from the year end level of $542 million and represents 3.6% of inventory.  Average VaR for the quarter of $8.4 million was lower by 13%, compared to $9.7 million for the fourth quarter.”

The attached financial tables should be read in conjunction with our Annual Report on Form 10-K for the year ended November 30, 2015. Amounts herein pertaining to February 29, 2016 represent a preliminary estimate as of the date of this earnings release and may be revised in our Quarterly Report on Form 10-Q for the quarterly period ended February 29, 2016.

This release contains “forward-looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include statements about our future results and performance, including our future market share and expected financial results. It is possible that the actual results may differ materially from the anticipated results indicated in these forward-looking statements. Please refer to our most recent Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from those projected in these forward-looking statements.

Jefferies, the world’s only independent full-service global investment banking firm focused on serving clients for over 50 years, is a leader in providing insight, expertise and execution to investors, companies and governments. Our firm provides a full range of investment banking, sales, trading, research and strategy across the spectrum of equities, fixed income and foreign exchange, as well as wealth management, in the Americas, Europe and Asia. Jefferies Group LLC is a wholly-owned subsidiary of Leucadia National Corporation (NYSE: LUK), a diversified holding company.

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For further information, please contact:
Peregrine C. Broadbent
Chief Financial Officer
Jefferies Group LLC
(212) 284-2338