JEFFERIES FINANCIAL GROUP INC.
Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of
The Rating Outlook remains Positive.
Key Rating Drivers
IDR, SENIOR DEBT AND PREFERRED STOCK
The Positive Outlook on JFG's ratings continues to reflect its improving franchises in core investment banking (IB) activities, expansion of balance sheet-light, more stable and higher-margin revenue streams, and good strategic execution, while adequately managing associated risks. The Positive Outlook also reflects Fitch's expectation for continued monetizations in JFG's legacy merchant banking portfolio and reduction of its debt. However, Fitch notes that current cyclical industry headwinds could adversely affect earnings strength over the near to medium term, and will move any positive rating potential toward the latter part of Fitch's 12-24-month Outlook horizon from when the Outlook was revised in
The affirmation reflects JFG's established franchise in IB and capital markets, full-service capabilities as an IB and institutional brokerage firm, enhanced performance stability and consistently conservative leverage and liquidity positions. JFG's liquidity and leverage profiles help offset risks from the lower liquidity of the remaining legacy merchant banking portfolio. Fitch views favorably management's continued execution of its strategy to simplify the firm and generate more consistent earnings over time. Effective
JFG's ratings remain constrained by the inherent earnings variability in IB, reliance on short-term secured funding and elevated operational risk associated with the securities firm business model.
Revenue volatility is an inherent constraint on the business model of securities firms, as trading and capital markets businesses are transactional and mostly cyclical. JFG's consolidated FY22 (ended
Despite relatively tough market conditions in 2022, pre-tax ROAE was 10.1%, down from 22.5% in FY21, and 11.2% in FY20, but was just above the upper-end of Fitch's 'bbb' category benchmark range of 5% to 10% for securities firms with high balance sheet usage. Fitch believes that macro-economic environment headwinds, including the likelihood of recessions in the eurozone and
JFG maintains a conservative leverage and liquidity profile. Net adjusted leverage, defined by Fitch as tangible assets excluding securities borrowed and reverse repurchase agreements, divided by tangible common equity (TCE), was 5.0x at
JFG mitigates the risks of its market-sensitive, primarily wholesale, short-term, secured funding profile by maintaining a strong liquidity position. Cash and equivalents as a percentage of total assets were 17.2% at
JFG demonstrated a strong ability to manage its trading risks during FY22 and FY21, as evidenced by a limited number of trading loss days and generally low losses on those days. Fitch-stressed VaR, which is calculated as the 10-day, 99% high VaR multiplied by a factor of five to reflect severe market conditions, was 5.0% of TCE as of end-9M22, down from 5.9% at FY21.
A Long-Term IDR of 'BBB' corresponds to a Short-Term IDR of 'F2' or 'F3' according to Fitch's 'Non-Bank Financial Institutions Rating Criteria' dated
The rating on JFG's cumulative convertible preferred stock is two notches down from the company's IDR. The two-notch differential reflects the subordination of the preferred stock to all senior debt and the fact that it may be converted into common shares. 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
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Alteration of the firm's risk profile, resulting in outsized performance volatility or material trading/credit losses;
Sustained increase in net leverage above 10x;
Deterioration in the firm's liquidity and funding profile as evidenced by a decline in the liquid assets to short-term funding ratio below 100%;
Sustained underperformance in core business segments;
Increased risk appetite at joint ventures (
A key person event with respect to the CEO and/or President would not necessarily result in an immediate downgrade but would be evaluated in the context of the potential impact on the firm's strategic direction. The fact that key person risk resides with two individuals, rather than one, is a potential mitigant.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Continued maintenance of strong franchise and market position as evidenced by sustained operating income to average equity ratio of 10% or above;
Maintenance of net adjusted leverage below 10x;
Continued conservative liquidity posture as evidenced by liquid assets to short term funding above 150%;
Execution against stated objectives, including profitable realizations in the merchant banking portfolio, as well as more consistent profit contributions from the asset management business would also be viewed favorably.
Still, any potential positive rating momentum will likely be limited to the 'BBB' rating category given the sensitivity of the business model to market and funding risks.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The unsecured debt ratings are equalized with the Long-Term IDR and reflect the firm's largely unsecured corporate funding profile and Fitch's expectation for average recovery prospects on the debt under a stressed scenario.
The rating on JFG's cumulative convertible preferred stock is two notches down from the company's IDR. The two-notch differential reflects the subordination of the preferred stock to all senior debt and the fact that it may be converted into common shares. The preferred stock is not afforded equity credit by Fitch given that it has a fixed conversion rate and lacks a mandatory conversion feature.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The short-Term IDR is primarily sensitive to any change in JFG's Long-Term IDR. However, an improvement in JFG's FLC score, resulting in an upgrade of the sub-factor score to 'bbb+', could result in an upgrade of the Short-Term IDR to 'F2'.
The unsecured debt ratings are equalized with the Long-Term IDR and are expected to move in tandem. The rating of JFG's cumulative convertible preferred stock is primarily sensitive to JFG's IDR.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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