JEFFERIES FINANCIAL GROUP INC. The purpose of this section is to discuss and analyze our consolidated financial condition, liquidity and capital resources and results of operations for the twelve months endedNovember 30, 2020 and 2019. For a discussion of our results of operations and liquidity and capital resources for the eleven months endedNovember 30, 2018 , see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedNovember 30, 2019 , which was filed with theSEC onJanuary 29, 2020 , and Exhibit 99.1, Part II, Item 7 of our Form 8-K, which was filed with theSEC onJune 3, 2020 . This analysis should be read in conjunction with the consolidated financial statements and related footnote disclosures contained in this report and the following "Cautionary Statement for Forward-Looking Information." Cautionary Statement for Forward-Looking Information Statements included in this report may contain forward-looking statements. Such statements may relate, but are not limited, to projections of revenues, income or loss, development expenditures, plans for growth and future operations, competition and regulation, as well as assumptions relating to the foregoing. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this report, the words "will," "could," "estimates," "expects," "anticipates," "believes," "plans," "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. Factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted or may materially and adversely affect our actual results include, but are not limited to, those set forth in Item 1A. Risk Factors and elsewhere in this report and in our other public filings with theSEC . Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. Except as may be required by law, we undertake no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report or to reflect the occurrence of unanticipated events. Results of Operations We are engaged in investment banking and capital markets, asset management and direct investing.Jefferies Group , our largest subsidiary, is now the largest independent full-service global investment banking firm headquartered in theU.S. During the first quarter of 2020, we changed our internal structure with regard to our operating segments. Previously, our segments consisted of (1) Investment Banking, Capital Markets and Asset Management, which included all of the financial results ofJefferies Group ; (2) Merchant Banking; and (3) Corporate. In the first quarter of 2020, we appointed co-Presidents of Asset Management and created a separate fourth operating segment that consists of the asset management activity previously included in our Investment Banking, Capital Markets and Asset Management segment, together with asset management activity previously 23 --------------------------------------------------------------------------------
included in our Merchant Banking segment. Our segments consist of: (1) Investment Banking and Capital Markets; (2) Asset Management; (3) Merchant Banking; and (4) Corporate.
In the fourth quarter of 2018, we changed our fiscal year end from a calendar year basis to a fiscal year ending onNovember 30 . Our 2018 fiscal year consists of the eleven month transition period beginningJanuary 1, 2018 throughNovember 30, 2018 .Jefferies Group has aNovember 30 year end. Prior to the fourth quarter of 2018, because our fiscal year end wasDecember 31 , we reflectedJefferies Group in our consolidated financial statements utilizing a one month lag. In connection with our change in fiscal year end toNovember 30 , we eliminated the one month lag utilized to reflectJefferies Group results beginning with the fourth quarter of 2018. Therefore, our results for the eleven months endedNovember 30, 2018 , include twelve month results forJefferies Group and eleven months for the remainder of our results.
The following tables present a summary of our financial results.
A summary of results of operations for the twelve months ended
Investment
Banking and Asset Merchant Parent Company Consolidation
Capital Markets Management Banking Corporate Interest Adjustments Total
Net revenues $ 4,989,138 $ 235,255 $ 764,460 $ 13,258 $ - $ 8,763 $ 6,010,874
Expenses:
Compensation and
benefits 2,735,080 89,527 77,072 39,184 - - 2,940,863
Cost of sales 241,083 (1) 25,509 (1) 338,588 - - - 605,180
Interest - - 31,425 (2) - 53,445 - 84,870
Depreciation and
amortization 82,334 5,247 67,362 3,496 - - 158,439
Selling, general and
other expenses 810,753 46,045 199,128 26,197 - (3,167) 1,078,956
Total expenses 3,869,250 166,328 713,575 68,877 53,445 (3,167) 4,868,308
Income (loss) from
continuing operations
before income taxes and
loss related to
associated companies 1,119,888 68,927 50,885 (55,619) (53,445) 11,930 1,142,566 Loss related to associated companies - - (75,483) - - - (75,483) Income (loss) from continuing operations before income taxes$ 1,119,888 $ 68,927 $ (24,598) $ (55,619) $ (53,445) $ 11,930 1,067,083 Income tax provision from continuing operations 298,673 Net income$ 768,410 (1) Includes Floor brokerage and clearing fees. (2) Interest expense within Merchant Banking of$31.4 million for the twelve months endedNovember 30, 2020 primarily includes$26.7 million forFoursight Capital and$4.7 million for Vitesse Energy Finance. 24
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A summary of results of operations for the twelve months ended
Investment
Banking and Asset Merchant Parent Company Consolidation
Capital Markets Management Banking Corporate Interest Adjustments Total
Net revenues $ 3,035,988 $ 84,894 $ 735,213 $ 32,833 $ - $ 4,048 $ 3,892,976
Expenses:
Compensation and
benefits 1,641,814 63,305 61,767 58,005 - - 1,824,891
Cost of sales 202,425 (1) 20,715 (1) 319,641 - - - 542,781
Interest - - 34,129 (2) - 53,048 - 87,177
Depreciation and
amortization 77,549 2,042 69,805 3,475 - - 152,871
Selling, general and
other expenses 767,150 40,432 162,832 39,820 - (591) 1,009,643
Total expenses 2,688,938 126,494 648,174 101,300 53,048 (591) 3,617,363Income (loss) from continuing operations before income taxes and income related to associated companies 347,050 (41,600) 87,039 (68,467) (53,048)
4,639 275,613 Income related to associated companies - 474 202,453 - - 68 202,995 Income (loss) from continuing operations before income taxes$ 347,050 $ (41,126) $ 289,492 $ (68,467) $ (53,048) $ 4,707 478,608 Income tax benefit from continuing operations (483,955) Net income$ 962,563 (1) Includes Floor brokerage and clearing fees. (2) Interest expense within Merchant Banking of$34.1 million for the twelve months endedNovember 30, 2019 primarily includes$29.0 million forFoursight Capital and$4.8 million for Vitesse Energy Finance. 25 --------------------------------------------------------------------------------
A summary of results of operations for the eleven months ended
Investment
Banking and Asset Merchant Parent Company Consolidation
Capital Markets Management Banking Corporate Interest Adjustments Total
Net revenues $ 3,184,426 $ (14,280) $ 577,278 $ 22,300 $ - $ (5,690) $ 3,764,034
Expenses:
Compensation and
benefits 1,715,915 47,363 50,155 50,222 - (873) 1,862,782
Cost of sales 178,841 (1) 5,369 (1) 307,071 - - - 491,281
Interest - 8,992 26,167 (2) - 54,090 - 89,249
Depreciation and
amortization 67,467 1,324 48,357 3,169 - - 120,317
Selling, general and
other expenses 757,290 57,394 112,587 35,049 - (992) 961,328
Total expenses 2,719,513 120,442 544,337 88,440 54,090 (1,865) 3,524,957
Income (loss) from
continuing operations
before income taxes and
income related to
associated companies 464,913 (134,722) 32,941 (66,140) (54,090) (3,825) 239,077 Income related to associated companies - 993 56,030 - - - 57,023 Income (loss) from continuing operations before income taxes$ 464,913 $ (133,729) $ 88,971 $ (66,140) $ (54,090) $ (3,825) 296,100 Income tax provision from continuing operations 19,008 Income from discontinued operations, net of income tax provision 130,063 Gain on disposal of discontinued operations, net of income tax provision 643,921 Net income$ 1,051,076 (1) Includes Floor brokerage and clearing fees. (2) Interest expense within Merchant Banking of$26.2 million for the eleven months endedNovember 30, 2018 primarily includes$20.6 million forFoursight Capital and$3.3 million for Vitesse Energy Finance. The composition of our financial results has varied over time and we expect will continue to evolve. Our strategy is designed to transform Jefferies into a pure financial services firm and, as such, we are focused on the development of our Investment Banking and Capital Markets, and Asset Management segments, while we continue to realize the value of or otherwise transform our investments in Merchant Banking. The following factors and events should be considered in evaluating our financial results as they impact comparisons: DuringMarch 2020 , the global COVID-19 pandemic and initial actions taken in response wreaked havoc on the global economy and all financial markets, and adversely affected our businesses. Subsequently, with various government actions and more clarity from theU.S. Federal Reserve Bank on future interest rate policy, the equity markets have experienced a strong rebound and a supportive trading environment for investors has emerged along with renewed activity in the equity and debt new issue capital markets.Jefferies Group has experienced strong market volumes and increased client activity across its capital markets business with considerably improved performance, and mergers and acquisition activity was significant in the latter part of the year. We continue to monitor the impact of the pandemic on the operations and value of our investments. Our leadership is continuously monitoring circumstances around COVID-19, as well as economic and capital market conditions, and providing frequent communications to both our clients and our employees. 26 --------------------------------------------------------------------------------
Our 2020 financial results from continuing operations were impacted by:
•Record pre-tax income of$1,177.5 million fromJefferies Group reflecting record total net revenues of$5,197.5 million , including: •Record Investment Banking net revenues of$2,398.2 million , including record advisory net revenues of$1,053.5 million , record equity underwriting net revenues of$902.0 million and debt underwriting net revenues of$546.0 million ; •Record combined Capital Markets net revenues of$2,469.7 million , including record equities net revenues of$1,128.9 million and record fixed income net revenues of$1,340.8 million ; and •Record Asset Management revenues (before allocated net interest) of$256.8 million . •Pre-tax loss of$24.6 million related to our Merchant Banking businesses reflecting: •Record performance from Idaho Timber and a positive contribution from Vitesse Energy Finance; •A gain of$61.5 million from effective short-term hedges against mark-to-market and fair value decreases in some of our other investments within Merchant Banking; •A$44.2 million non-cash charge to write down the value of our investment inWeWork in the first half of 2020; •Non-cash charges of$73.9 million related to write-downs of real estate investments atHomeFed ; and •Non-cash charge of$13.2 million to write down Vitesse Energy Finance's oil and gas assets in theDenver-Julesburg Basin ("DJ Basin ") and$34.6 million to write down the value of our investment in JETX Energy to reflect the decline in oil prices. Our 2019 financial results from continuing operations were impacted by: •A nonrecurring tax benefit of$544.6 million related to the closing of our available for sale portfolio, which triggered the realization of lodged tax benefits from earlier years; •The special dividend of our interest in Spectrum Brands of$451.1 million , removing the investment from our Merchant Banking portfolio going forward; •A$205.0 million pre-tax gain on the sale of our remaining 31% interest in National Beef; •A$72.1 million pre-tax gain on the revaluation of our 70% interest inHomeFed to fair value in connection with the acquisition of the remaining common stock ofHomeFed ; and •A reduction during 2019 to the estimated fair value ofWeWork of$182.3 million . Our 2018 financial results from continuing operations were impacted by: •A$418.8 million mark-to-market decrease in the value of our investment inSpectrum Brands/HRG Group, Inc. ("HRG"); •A$221.7 million pre-tax gain on the sale of ourGarcadia interests; •A$70.9 million increase in the estimated fair value ofWeWork ; •A$62.1 million impairment loss related to our investment in FXCM; and •A$47.9 million impairment loss related to our investment inGolden Queen Mining Company, LLC ("Golden Queen"). Investment Banking and Capital Markets, and Asset Management Our Investment Banking and Capital Markets segment and Asset Management segment primarily consist of our investment inJefferies Group .Jefferies Group was acquired onMarch 1, 2013 .Jefferies Group financial data is presented in each year based on the twelve months endedNovember 30 . 27 --------------------------------------------------------------------------------
Investment Banking and Capital Markets
A summary of results of operations for our Investment Banking and Capital Markets segment is as follows (in thousands):
2020 2019 2018
Net revenues $ 4,989,138 $ 3,035,988 $ 3,184,426
Expenses:
Compensation and benefits 2,735,080 1,641,814 1,715,915
Floor brokerage and clearing fees 241,083 202,425 178,841
Depreciation and amortization 82,334 77,549 67,467
Selling, general and other expenses 810,753 767,150 757,290
Total expenses 3,869,250 2,688,938 2,719,513
Income from continuing operations before income taxes
Our Investment Banking and Capital Markets segment comprises many business units, with many interactions and much integration among them. Business activities include the sales, trading, origination and advisory effort for various equity, fixed income, commodities, foreign exchange and advisory services. Our Investment Banking and Capital Markets segment business, by its nature, does not produce predictable or necessarily recurring revenues or earnings. Our results in any given period can be materially affected by conditions in global financial markets, economic conditions generally, and our own activities and positions.
Revenues by Source
Net revenues presented for our Investment Banking and Capital Markets segment include allocations of interest income and interest expense as we assess the profitability of these businesses inclusive of the net interest revenue or expense associated with the respective activities, including the net interest cost of allocated long-term debt, which is a function of the mix of each business's associated assets and liabilities and the related funding costs.
The following provides a summary of net revenues by source (in thousands):
2020 2019 2018
Advisory $ 1,053,500 $ 767,421 $ 820,042
Equity underwriting 902,016 361,972 454,555
Debt underwriting 545,978 407,336 635,606
Total underwriting 1,447,994 769,308 1,090,161
Other investment banking (103,330) (14,617) 3,638
Total investment banking 2,398,164 1,522,112 1,913,841
Equities 1,128,910 773,979 665,557
Fixed income 1,340,792 681,362 559,712
Total capital markets 2,469,702 1,455,341 1,225,269
Other 121,272 58,535 45,316
Total Investment Banking and Capital Markets (1) (2)
(1)Includes net interest revenues of$12.3 million ,$74.0 million and$8.5 million for 2020, 2019 and 2018, respectively. (2)Allocated net interest is not separately disaggregated in presenting our Investment Banking and Capital Markets reportable segment within Net Revenues by Source. This presentation is aligned to our Investment Banking and Capital Markets internal performance measurement. 28 --------------------------------------------------------------------------------
Investment Banking Revenues
Investment banking is comprised of revenues from: • advisory services with respect to mergers and acquisitions and restructurings and recapitalizations; • underwriting services, which include underwriting and placement services related to corporate debt, municipal bonds, mortgage-backed and asset-backed securities and equity and equity-linked securities and loan syndication; • our 50% share of net earnings fromJefferies Group's corporate lending joint venture,Jefferies Finance ; and • securities and loans received or acquired in connection with our investment banking activities. The following table sets forth our investment banking activities (dollars in billions): Deals Completed Aggregate Value 2020 2019 2018 2020 2019 2018 Advisory transactions 228 195 195$ 217.5 $ 241.6 $ 193.9 Public and private debt financings 639 779 969$ 255.8 $ 190.7 $ 270.1 Public and private equity and convertible offerings 286 166 193$ 103.5 $ 45.3 $ 43.3 Investment banking revenues were a record$2,398.2 million for 2020, 57.6% higher than 2019. This reflects record performance in mergers and acquisitions, record results in equity underwriting and solid performance in debt underwriting, while the results for 2019 were impacted by the significant industry-wide decline in equity and leverage finance activity across theU.S. andEurope during the year. Our 2020 advisory revenues were a record$1,053.5 million , up$286.1 million , or 37.3% higher than 2019, reflecting a meaningful acceleration of activity in the second half of 2020. Our underwriting revenues for 2020 were$1,448.0 million , an increase of$678.7 million , or 88.2%, from 2019, due to record results in equity underwriting and solid performance in debt underwriting, as clients took advantage of both a strong rebound in equity valuations, and in loan and bond prices to raise capital after the initial market disruption from COVID-19 subsided. From equity and debt underwriting activities, we generated$902.0 million and$546.0 million in revenues, respectively, for 2020, compared with$362.0 million and$407.3 million in revenues, respectively, for 2019. Other investment banking revenues were a loss of$103.3 million for 2020, compared with a loss of$14.6 million for 2019. The results for 2020 include a net loss of$37.5 million from our share of the net earnings of theJefferies Finance joint venture, reflecting unrealized losses related to the write down of commitments and loans held-for-sale, as well as reserves recorded on the loan portfolio during the current year period, primarily due to the impact of COVID-19 on the markets and the economy. This compares with net revenues of$22.3 million during 2019, inclusive of$12.5 million in costs from refinancing its debt. The results in both years also include the amortization of costs and allocated interest expense related to our investment in theJefferies Finance business. In addition, Other investment banking results for 2020 include unrealized write-downs of private equity investments received or acquired in connection with our investment banking activities. Equities Net Revenues Equities are comprised of net revenues from: •services provided to our clients from which we earn commissions or spread revenue by executing, settling and clearing transactions for clients; •advisory services offered to clients; •financing, securities lending and other prime brokerage services offered to clients; and •wealth management services. InMay 2020 ,Greenwich Associates namedJefferies Group as the top firm in helping clients navigate the markets as COVID-19 significantly impacted equity markets in mid-March, causing volatility and increased trading volumes. These results were based on a survey they had conducted of more than 75 buy-side institutions evaluating brokers' performances in providing clients with liquidity, hedging solutions, market color and insights. Total equities net revenues were a record$1,128.9 million for 2020, an increase of 45.9%, over the$774.0 million for 2019. Our strong performance was a result of the continued expansion of our business both from a product and geographic perspective, increased market volumes and the continued momentum of our client franchise. We increased our market share globally, as we were well-positioned to respond to our clients' dynamic needs during the year. 29 -------------------------------------------------------------------------------- Our overall results included record net revenues across each region, including theAmericas ,Europe , andAsia Pacific . Each of our regional businesses is continuing to benefit from our overall global expansion and network. We believe we provided consistent and exceptional advisory and execution capabilities to our clients globally throughout this unprecedented period. On a product basis, our overall results included record net revenues in our global cash equities businesses and across most of our global electronic trading businesses, as well as our domestic and international convertibles businesses. Our electronic trading and convertibles franchises continued to maintain several market-leading positions, while our cash equities franchise continued to improve its market share and competitive positioning. InNovember 2020 ,Greenwich Associates ranked our international convertibles business as #1 inEurope andAsia , excludingJapan , with significant market share and continued momentum. The record results in our global cash equities businesses were driven by increased client activity, market volumes and improved trading. While global market trading volumes and higher volatility drove an increase in commissions, our results inAsia Pacific were also driven by our expansion and investment in the region in 2019 and 2020 across advisory and execution capabilities. The record results in our global convertibles business was driven by strong primary and secondary trading activity and higher volatility, and also the expansion of the business inLondon we undertook in late 2018. Our global electronic trading business achieved record results, which were driven by increased global market volumes, volatility, and the continued strength of the global platform. Our exchange traded funds business had higher results driven by increased trading revenues and the better market environment.
Fixed Income Net Revenues
Fixed income is comprised of net revenues from: •executing transactions for clients and making markets in securitized products, investment grade, high-yield, emerging markets, municipal and sovereign securities and bank loans, as well as foreign exchange execution on behalf of clients; •interest rate derivatives and credit derivatives; and •financing services offered to clients. Fixed income net revenues totaled a record$1,340.8 million for 2020, an increase of 96.8% compared with net revenues of$681.4 million for 2019, a result of strong client activity both in primary and secondary markets across products and regions, as well as periods of elevated market volatility. Our overall results included record net revenues regionally in each of theAmericas ,Europe andAsia , as the business successfully managed through the markets' high volumes and levels of uncertainty during the year. Our global rates businesses generated record net revenues for 2020, driven by higher volatility and wider bid-offer spreads, particularly during the second quarter. Our results for 2020 also benefited from low interest rates and a favorable market environment, compared to 2019 when economic challenges and uncertainties, such as Brexit, limited client activity and trading opportunities. Record results in our leveraged credit, European and Asian credit and investment grade corporates businesses resulted from robust revenues across regions and products due to increased client activity and higher levels of volatility during 2020. Similarly, record revenues from our global emerging markets business benefited from more favorable market conditions driving strong investor demand, as well as an increase in new issuance. Revenues in ourU.S. securitized markets group were higher due to an increase in demand for new issuance in the securitization markets and as the relative higher yields on securitized products drove investor demand in the second half of 2020.
The record results were partially offset by lower revenues in our municipal securities business, which was impacted by a significant sell-off in the second quarter of 2020 before stabilizing and recovering over the second half of 2020.
30
--------------------------------------------------------------------------------Other
Other is comprised of revenues from: • Berkadia and other investments (other thanJefferies Finance , which is included in Other investment banking); • principal investments in private equity and hedge funds managed by third-parties or related parties and that are not part of our asset management platform; and • investments held as part of employee benefit plans, including deferred compensation plans (for which we incur an equal and offsetting amount of compensation expenses).
Net revenues from our other business category totaled
Results for 2020 include net revenues of$68.9 million due to our share of the net income of Berkadia compared with net revenues$88.2 million in 2019. The lower net revenues for 2020 are due to the impairment of mortgage servicing rights as a result of lower interest rates and a decline in loan originations due to the impact of COVID-19 in the second quarter of 2020, with increased volumes and improved valuations returning in the latter part of the year. The results for 2020 also include gains of$61.5 million from hedges that were bought and sold in the first quarter as we took a negative view of the market due to the onset of the COVID-19 pandemic.
Compensation and Benefits
Compensation and benefits expense consists of salaries, benefits, commissions, annual cash compensation awards and share-based awards to employees. Cash awards are recorded during the year of the award unless there are future service period requirements. Those with future service requirements are amortized into compensation expense over the required service period. Share-based awards to employees and senior executive awards are also amortized over their respective vesting periods. Compensation and benefits expense increased to$2,735.1 million in 2020 from$1,641.8 million in 2019. The following table provides a summary of compensation and benefits expense (dollars in thousands): 2020 2019 Compensation expense without future service requirements$ 2,242,701 $ 1,302,350 Amortization of share-based and cash-based awards 312,761 339,464 Amendment of certain service provisions 179,618 - Total Compensation and benefits expense $
2,735,080
Compensation and benefits expense as a percentage of Net revenues
54.8 % 54.1 %
Compensation and benefits expense as a percentage of Net revenues, excluding the impact of the amendment of certain service provisions
51.2 % 54.1 %
A significant portion of compensation expense remains variable. Compensation and
benefits expense increased in line with the significant increase in net
revenues. During the fourth quarter of 2020, Jefferies Group amended the service
requirement provisions of certain cash-based awards that had been granted during
previous years. Compensation expense of $179.6 million was recorded to reflect
the acceleration of amortization that resulted from these amendments.
31
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Non-Compensation Expenses
Non-compensation expenses include floor brokerage and clearing fees,
underwriting costs, technology and communications expense, occupancy and
equipment rental expense, business development, professional services, bad debt
provision, impairment charges, depreciation and amortization expense and other
costs. All of these expenses, other than floor brokerage and clearing fees and
depreciation and amortization expense, are included in Selling, general and
other expenses in the Consolidated Statements of Operations.
Non-compensation expenses were $1,134.2 million for 2020, an increase of $87.1
million , or 8.3%, compared with $1,047.1 million for 2019. Non-compensation
expenses as a percentage of Net revenues were 22.7% and 34.5% for 2020 and 2019,
respectively, demonstrating the operating leverage inherent in our business.
The increase in non-compensation expenses was primarily due to higher Floor
brokerage and clearing fees due to record net revenues in equities and fixed
income resulting from an increase in trading volumes. The increase was also due
to higher underwriting costs, primarily due to record investment banking net
revenues resulting from an increase in the number of transactions and higher
technology and communication expenses, primarily related to costs associated
with the development of various trading systems, increased market data and
higher connectivity usage due to the expansion of certain businesses in Asia .
Non-compensation expense also increased due to higher other expenses, which
included our charitable donations of $8.6 million , in memory of Peg Broadbent ,
Jefferies Group's longstanding, esteemed CFO who tragically died from
complications of COVID-19 in March. Additionally, other expenses also included
$34.0 million attributed to our donation made to various charities in support of
the Australian wildfire relief effort, costs associated with the early
retirement of Jefferies Group's 6.875% senior notes in November 2020 and costs
related to provisions for receivable losses. The increase in non-compensation
expenses was partially offset by significantly lower business development
expenses as business travel and hosted events were curtailed due to COVID-19.
Asset Management
Our asset management business is a diversified alternative asset management platform offering institutional clients an innovative range of investment strategies through us and our affiliated asset managers. We provide certain of our affiliated asset managers access to fully integrated global operational infrastructure and support. This may include strategy and product development, daily operations and finance-related activities, compliance, legal and human resources support, as well as all aspects of business development. Collectively, we and our affiliated asset managers have net asset values or net asset value equivalent assets under management of approximately$26.8 billion as ofNovember 30, 2020 and$20.7 billion as ofNovember 30, 2019 . Net asset values or net asset value equivalent assets under management are comprised of the fair value of the net assets of a fund, the net capital invested in a separately managed account, par value of collateralized loan obligations or notional account value. These include the following: •$12.6 billion (2020) and$7.2 billion (2019) - This includes the assets under management raised by affiliated asset managers with whom we have an ongoing profit or revenue sharing arrangement. In some instances, due to the timing of payments and crystallization of profits or revenue, the majority of revenue related to these relationships will be realized at their calendar year-end (during our first fiscal quarter). •$10.8 billion (2020) and$9.5 billion (2019) - Asset management activities withinJefferies Finance , our 50/50 joint venture withMassachusetts Mutual Life Insurance Company , which represent the aggregate par value of collateralized loan obligations managed byJefferies Finance , including those consolidated byJefferies Finance . Because management evaluates segment performance based on the inclusion of our share of the net earnings of ourJefferies Finance joint venture in our Investment Banking and Capital Markets segment, those activities are excluded from our Asset Management segment results. •$2.6 billion (2020) and$2.8 billion (2019) - Net asset values of investments made by us in funds or separately managed accounts. At times, we will incubate strategies using our own capital during the institutional build-out phase before opening investments to outside capital. This net asset value includes our seed capital of$1.5 billion (2020) and$1.3 billion (2019) in addition to amounts financed of$1.1 billion (2020) and$1.5 billion (2019), invested in funds and separately managed accounts that are managed by us and our affiliated asset managers. •$0.8 billion (2020) and$1.2 billion (2019) - This includes third-party investments actively managed by wholly-owned divisions. 32 -------------------------------------------------------------------------------- A summary of results of operations for our Asset Management segment is as follows (in thousands): 2020 2019 2018 Net revenues$ 235,255 $ 84,894 $ (14,280) Expenses: Compensation and benefits 89,527 63,305 47,363 Floor brokerage and clearing fees 25,509 20,715 5,369 Interest - - 8,992 Depreciation and amortization 5,247 2,042 1,324 Selling, general and other expenses 46,045 40,432 57,394 Total expenses 166,328 126,494 120,442
Income (loss) from continuing operations before income taxes and income related to associated companies
68,927 (41,600) (134,722)
Income related to associated companies - 474 993
Income (loss) from continuing operations before income
taxes $ 68,927 $ (41,126) $ (133,729)
Revenues
Asset management net revenues include the following:
• Total asset management fees: management and performance fees from funds and
accounts managed by us;
• Revenue from arrangements with strategic affiliates: revenues from
affiliated asset managers in which we hold interests that entitle us to portions
of their revenues and/or profits, as well as earnings on our ownership interests
in our affiliated asset managers; and
• Investment return: this includes investment income from capital invested in
and managed by us and our affiliated asset managers.
The key components of asset management revenues are the level of assets under
management and the performance return, for the most part on an absolute basis
and, in certain cases, relative to a benchmark or hurdle, of us and our
affiliated asset managers. These components can be affected by financial
markets, profits and losses in the applicable investment portfolios and client
capital activity. Further, asset management fees vary with the nature of
investment management services. The terms under which clients may terminate our
investment management authority, and the requisite notice period for such
termination, varies depending on the nature of the investment vehicle and the
liquidity of the portfolio assets. Performance fees are generally recognized
once a year, typically in December, when they become fixed and determinable and
are not probable of being significantly reversed. As a result, the benefit of
performance fees attributable to performance during the latter eleven months of
each of our fiscal years is actually realized and recorded only in the first
quarter of our next fiscal year.
33
--------------------------------------------------------------------------------The following summarizes the results of our Asset Management businesses revenues by asset class (in thousands):
2020 2019 2018
Asset management fees:
Equities $ 6,158 $ 4,390 $ 3,446
Multi-asset 8,544 18,798 24,698
Total asset management fees 14,702 23,188 28,144
Revenue from arrangements with strategic affiliates (1) 11,837
1,807 6,099
Total asset management fees and revenues 26,539 24,995 34,243
Investment return (2) (3) 257,200 100,447 (9,288)
Allocated net interest (2) (4) (48,484) (40,548) (39,235)
Total Asset Management revenues $ 235,255 (1)The amounts include our share of fees received by affiliated asset management companies with which we have revenue and profit share arrangements, as well as earnings on our ownership interest in affiliated asset managers. (2)Net revenues attributed to the Investment return in our Asset Management segment have been disaggregated to separately present Investment return and Allocated net interest (see footnote 4 below). This disaggregation is intended to increase transparency and to make clearer actual Investment return. We believe that aggregating Investment return and Allocated net interest would obscure the Investment return by including an amount that is unique to our credit spreads, debt maturity profile, capital structure, liquidity risks and allocation methods. (3)Includes net interest expense of$24.5 million ,$8.9 million and$8.4 million for 2020, 2019 and 2018, respectively. (4)Allocated net interest represents the allocation of long-term debt interest expense to our Asset Management reportable segment, net of interest income on Cash and cash equivalents and other sources of liquidity. For discussion of sources of liquidity, refer to the "Liquidity and Capital Resources" section herein. Asset management net revenues for 2020 were a record$235.3 million , compared with$84.9 million for 2019, primarily as a result of higher investment returns. Since 2019, we made capital investments in several new separately managed accounts and funds. Total asset management revenues for 2020 are also reflective of a 6.2% increase in total asset management fees and revenues, primarily attributed to higher revenues from our share of fees received by affiliated asset management companies with which we have revenue and profit share arrangements, partially offset by a decline in asset management fees.
Expenses
The increase in expenses in 2020 as compared with 2019 primarily reflects the
expansion of the Asset Management business, additional costs from the wind down
of one of our asset management businesses and the dedication of resources
previously included in Corporate.
34
--------------------------------------------------------------------------------Assets under Management
The tables below include only third-party assets under management by us, excluding those of our affiliated asset managers.
Assets under management by predominant asset class were as follows (in
millions):
November 30, 2020 November 30, 2019
Assets under management (1)
Equities $ 481 $ 228
Multi-asset (2) 293 988
Total $ 774 $ 1,216
(1) Assets under management include third-party net assets actively managed by
us, including hedge funds and certain managed accounts. We may consolidate
certain funds and for such consolidated funds, assets under management include
the pro-rata portion of third- party net assets in consolidated funds based on
the percentage ownership of third-party investors in the consolidated fund. The
above amounts do not include assets under management at non-consolidated
strategic affiliates or investments.
(2) During 2020, certain of the assets under management in this asset class were
liquidated and the funds were returned to the third-party investors due to the
wind down of our quantPORT asset management platform.
Changes in assets under management during the year were as follows (in
millions):
Year Ended November 30,
2020 2019
Balance, beginning of period $ 1,216 $ 2,527
Net cash flow out (319) (1,383)
Net market appreciation (depreciation) (123) 72
Balance, end of period $ 774 $ 1,216
The change in assets under management in our wholly-owned managers during 2020
is primarily due to the liquidation and redemptions from certain funds related
to the wind down of our quantPORT asset management platform and market
depreciation, partially offset by increased investments by third-parties in
certain funds and managed accounts. The change in assets under management during
2019 is primarily due to redemptions from certain funds and separately managed
accounts and dissolution of a fund, partially offset by new subscriptions and
investments from third-parties and market appreciation.
Our definition of assets under management is not based on any definition
contained in any of our investment management agreements and differs from the
manner in which "Regulatory Assets Under Management" is reported to the SEC on
Form ADV.
35
--------------------------------------------------------------------------------Asset Management Investments
Our asset management business makes seed and additional strategic investments directly in alternative asset management separately managed accounts and co-mingled funds where we act as the asset manager or in affiliated asset managers where we have strategic relationships and participate in the earnings or profits of the affiliated manager. Our asset management investments generated an investment return of$257.2 million and$100.4 million for 2020 and 2019, respectively. The following table reflects amounts invested by asset manager (in thousands): November 30, November 30, 2020 2019Jefferies Financial Group Inc. , as manager: Fund investments (1)$ 258,893 $ 240,804 Separately managed accounts (2) 352,084 489,617 Total 610,977 730,421 Strategic affiliates, as manager: Fund investments (3) 650,585 306,554 Separately managed accounts (2) 323,943 266,484 Investments in asset managers 162,268 114,161 Total 1,136,796 687,199 Total asset management investments $
1,747,773
(1) Due to the level or nature of an investment in a fund, we may consolidate that fund, and accordingly, the assets and liabilities of the fund are included in the representative line items in the consolidated financial statements. AtNovember 30, 2020 and 2019,$0.1 million and$22.6 million , respectively, represents net investments in funds that have been consolidated in our financial statements. (2) Where we have investments in a separately managed account, the assets and liabilities of such account are presented in the Consolidated Statements of Financial Condition within each respective line item. (3) The increase in 2020 was primarily due to an investment in a new fund. 36 --------------------------------------------------------------------------------
Merchant Banking
The composition of our Merchant Banking portfolio has been impacted by a number of transactions during recent years. The following chart reflects the significant components of our portfolio each year:
Twelve Months Ended Twelve Months Ended Eleven Months Ended November
November 30, 2020 November 30, 2019 30, 2018
Consolidated Businesses Oil and Gas Oil and Gas Oil and Gas
HomeFed HomeFed beginning July 1 -
Idaho Timber Idaho Timber Idaho Timber
National Beef prior to June
- - 5
Associated Companies Linkem Linkem Linkem
FXCM Equity Investment FXCM Equity Investment FXCM Equity Investment
Golden Queen Golden Queen Golden Queen
National Beef sold November National Beef beginning June
- 29 5
- HomeFed prior to July 1 HomeFed
- - Garcadia sold August 17
Berkadia prior to transfer
- - to Jefferies Group October 1
Other Investments FXCM Term Loan FXCM Term Loan FXCM Term Loan
WeWork WeWork WeWork
Spectrum Brands prior to
- October 11 distribution Spectrum Brands/HRG
A summary of results for Merchant Banking is as follows (in thousands):
Twelve Months Twelve Months Eleven Months
Ended November Ended November Ended November
30, 2020 30, 2019 30, 2018
Net revenues $ 764,460 $ 735,213 $ 577,278
Expenses:
Compensation and benefits 77,072 61,767 50,155
Cost of sales 338,588 319,641 307,071
Interest 31,425 34,129 26,167
Depreciation and amortization 67,362 69,805 48,357
Selling, general and other expenses 199,128 162,832 112,587
Total expenses 713,575 648,174 544,337
Income from continuing operations before income taxes and income (loss) related to associated companies
50,885 87,039 32,941
Income (loss) related to associated companies (75,483) 202,453 56,030
Income (loss) from continuing operations before income
taxes $ (24,598) $ 289,492 $ 88,971
In the fourth quarter of 2018, we transferred our 50% membership interest in
Berkadia into Jefferies Group . Income from continuing operations before income
taxes related to the net assets transferred was $78.7 million for the eleven
months ended November 30, 2018 .
The increase in Net revenues in 2020 as compared to 2019 is primarily due to an
increase in revenues at Idaho Timber and an increase in realized and unrealized
gains on financial instruments, partially offset by the 2019 pre-tax gains on
the sale of our remaining 31% interest in National Beef and on the revaluation
of our 70% interest in HomeFed to fair value in connection with the acquisition
of the remaining common stock of HomeFed . The increase in Compensation and
benefits expense in 2020 as
37
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compared to 2019 is primarily due to an increase at Idaho Timber and the full
year acquisition impact of HomeFed . The increase in Cost of sales in 2020 as
compared to 2019 primarily reflects the increased sales at Idaho Timber. The
increase in Selling, general and other expenses in in 2020 as compared to 2019
primarily reflects increased non-cash charges in 2020 to JETX Energy's and
Vitesse Energy Finance's oil and gas assets and write-downs to some of our real
estate investments at HomeFed , partially offset by lease abandonment charges at
JETX Energy in 2019.
A summary of results for Merchant Banking by significant business and investment is as follows (in thousands):
Income (Loss)
from Associated Total Pre-Tax
Revenues Expenses Companies Income (Loss)
For the twelve months ended November 30,
2020
Oil and gas $ 141,973 $ 178,679 $ - $ (36,706)
Idaho Timber 421,497 341,796 - 79,701
Real estate 47,160 66,043 (46,050) (64,933)
FXCM 335 - 3,604 3,939
Other 153,495 127,057 (33,037) (6,599)
Total $ 764,460 $ 713,575 $ (75,483) $ (24,598)
For the twelve months ended November 30,
2019
Oil and gas $ 150,224 $ 170,680 $ - $ (20,456)
Idaho Timber 324,786 306,832 - 17,954
Real estate 37,405 39,940 7,549 5,014
FXCM (8,139) - (8,212) (16,351)
National Beef - - 232,042 232,042
Spectrum Brands 89,497 - - 89,497
Other 141,440 130,722 (28,926) (18,208)
Total $ 735,213 $ 648,174 $ 202,453 $ 289,492
For the eleven months ended November 30,
2018
Oil and gas $ 169,667 $ 116,017 $ - $ 53,650
Idaho Timber 357,513 321,851 - 35,662
Real estate 350 977 6,956 6,329
FXCM 18,616 - (83,174) (64,558)
National Beef - - 110,049 110,049
Spectrum Brands/HRG (412,493) - - (412,493)
Berkadia - - 80,092 80,092
Other 443,625 105,492 (57,893) 280,240
Total $ 577,278 $ 544,337 $ 56,030 $ 88,971
Oil and Gas
Oil and gas results for 2020 were lower than 2019 primarily due to curtailed
production, lower oil prices and impairment charges recorded during the first
half of the year. Oil and gas net revenues totaled $142.0 million during 2020
and $150.2 million during 2019, and primarily consist of three components:
•Production revenues (include the impact of realized gains and losses related to
oil hedges) were $156.8 million in 2020 and $176.9 million in 2019. The decrease
in production revenues related both to lower oil prices on current volume and
decisions made to pause production on a portion of operating wells due to
expectation of higher future prices. Production revenues included realized gains
on oil hedges of $52.7 million in 2020 and $1.5 million in 2019.
•Net unrealized losses related to oil hedge derivatives were $7.0 million in
2020 and $6.5 million in 2019. As discussed further in Note 4 to the
consolidated financial statements, Vitesse Energy Finance uses swaps and call
and put options to reduce exposure to future oil price fluctuations. For 2020,
approximately 108% of oil production was hedged at a
38
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weighted average price of approximately $60 /barrel. For 2021, approximately 50%
of expected oil production is hedged at a weighted average price of
approximately $54 /barrel.
•Mark-to-market losses related to a financial instrument owned held at fair
value were $7.8 million during 2020 and $20.2 million during 2019.
Total expenses for Oil and gas were $178.7 million during 2020 as compared to
$170.7 million in 2019. Although some of Vitesse Energy Finance's operating
expenses were lower due to reduced production, this was offset by non-cash
charges in 2020 to JETX Energy's oil and gas assets of $34.6 million and to
Vitesse Energy Finance's oil and gas assets in the DJ Basin of $13.2 million .
2019 also included lease abandonment charges of $15.1 million and non-cash
charges to JETX Energy's oil and gas assets of $10.9 million at JETX Energy.
Idaho Timber
High demand for wood for home improvement and construction led to favorable
pricing and record results for Idaho Timber in 2020. Net revenues increased
during 2020 as compared to 2019, primarily due to an increase in average selling
price of 29%.
The increase in total expenses for Idaho Timber during 2020 as compared to 2019
primarily reflects increased cost of sales and increased compensation expense.
Real Estate
The increase in real estate revenues and real estate expenses during 2020 as
compared to 2019, primarily relates to the
Income (loss) related to real estate associated companies for 2020, includes a non-cash charge of$55.6 million to fully write off the value ofHomeFed's RedSky JZ Fulton Investors ("RedSky JZ Fulton Mall ") joint venture investment due to the softening of theBrooklyn real estate market and a non-cash charge of$6.9 million to fully write offHomeFed's interest in theBrooklyn Renaissance Plaza hotel related to the significant impact of COVID-19.
FXCM
Net revenues from our FXCM term loan include gains (losses) of
National Beef and Spectrum Brands
Income from associated companies in 2019, reflects our share of National Beef's
results prior to our sale in
Spectrum Brands net revenues reflect changes in the value of our investment. We classified Spectrum Brands as a financial instrument owned, at fair value for which the fair value option was elected and we reflected mark-to-market adjustments in Principal transactions revenues. We distributed all of our Spectrum Brands shares through a special pro rata dividend effective onOctober 11, 2019 . We recorded a$451.1 million dividend payable as of theSeptember 16, 2019 declaration date, which was equal to the fair value of Spectrum Brands shares at that time.
Other
Other revenues for 2019 include a$205.0 million pre-tax gain on the sale of our remaining 31% interest in National Beef and a$72.1 million pre-tax gain on the revaluation of our 70% interest inHomeFed to fair value in connection with the acquisition of the remaining common stock ofHomeFed . Other revenues also reflect realized and unrealized gains (losses) on financial instruments owned, which are held at fair value, of$54.7 million and$(279.3) million during 2020 and 2019, respectively. The gains (losses) on financial instruments owned include unrealized losses onWeWork of$43.0 million and$182.3 million during 2020 and 2019, respectively. The gains (losses) on financial instruments owned for 2020, also include a gain of$61.5 million from effective short-term hedges against mark-to-market and fair value decreases in our portfolio investments. 39 --------------------------------------------------------------------------------
Corporate
A summary of results of operations for Corporate is as follows (in thousands):
Twelve Months Twelve Months Eleven Months
Ended November Ended November Ended November
30, 2020 30, 2019 30, 2018
Net revenues $ 13,258 $ 32,833 $ 22,300
Expenses:
Compensation and benefits 39,184 58,005 50,222
Depreciation and amortization 3,496 3,475 3,169
Selling, general and other expenses 26,197 39,820 35,049
Total expenses 68,877 101,300 88,440
Loss from continuing operations before income taxes
Net revenues primarily include realized and unrealized securities gains and interest income for investments held at the holding company. Total expenses include share-based compensation expense of$13.7 million and$22.9 million for 2020 and 2019, respectively. Parent Company Interest Parent company interest totaled$53.4 million and$53.0 million for 2020 and 2019, respectively. In connection with the acquisition ofHomeFed in 2019, we began capitalizing interest. Capitalized interest was allocated among all ofHomeFed's projects that are currently under development. Parent company interest capitalized during 2020 and 2019 was$5.7 million and$6.0 million , respectively. Income Taxes Our provision for income taxes was$298.7 million for 2020, representing an effective tax rate of 28.0%. For 2019, our benefit for income taxes from continuing operations was$484.0 million . As discussed in the Notes to Consolidated Financial Statements, during the second quarter of 2019, we completed the sale of our available for sale portfolio. In connection therewith, we recognized a tax benefit of$544.6 million during 2019. Unrealized gains and losses on available for sale securities, and their associated tax impacts, are recorded directly to equity as part of the Accumulated other comprehensive income (loss) balance. Following the portfolio approach, when unrealized gains and losses and their associated tax impacts are recorded at a then current tax rate, and then realized later at a different tax rate, the difference between the tax impact initially recorded in Accumulated other comprehensive income (loss) and the tax impact removed from Accumulated other comprehensive income (loss) upon realization remains in Accumulated other comprehensive income (loss) until the disposal of the portfolio and is referred to as a "lodged tax effect." Large changes in the fair value of our available for sale securities, primarily during 2008 through 2010, combined with fluctuations in our tax rate during those periods, generated a lodged tax benefit of$544.6 million . As a result of steps to improve our Corporate investment management efforts, we sold the remaining portion of our available for sale portfolio in the second quarter of 2019, which resulted in the realization of the$544.6 million tax benefit. While this realization did not impact total equity, it resulted in a tax benefit reflected in the Consolidated Statement of Operations of$544.6 million and, as a result, Retained earnings increased and Accumulated other comprehensive income (loss) decreased by corresponding amounts. For further information on income taxes, see Note 19 to our consolidated financial statements. 40 --------------------------------------------------------------------------------
Discontinued Operations
OnJune 5, 2018 , we sold 48% of National Beef to Marfrig for$907.7 million in cash, reducing our then ownership in National Beef to 31%. We accounted for our remaining interest under the equity method of accounting. The 2018 sale of National Beef met the GAAP criteria to be classified as a discontinued operation as the sale represented a strategic shift in our operations and financial results. As such, we classified the results of National Beef prior toJune 5, 2018 as a discontinued operation and it is reported in Income from discontinued operations, net of income tax provision in the Consolidated Statements of Operations. In addition, we recognized a pre-tax gain as a result of the 2018 transaction of$873.5 million ($643.9 million after-tax) for the eleven months endedNovember 30, 2018 , which has been recognized as Gain on disposal of discontinued operations, net of income tax provision in the Consolidated Statement of Operations. A summary of the results of discontinued operations for National Beef for the period fromJanuary 1, 2018 throughJune 4, 2018 as included in discontinued operations for the eleven months endedNovember 30, 2018 is as follows (in thousands): Revenues: Beef processing services$ 3,137,611 Interest income 131 Other 4,329 Total revenues 3,142,071 Expenses: Compensation and benefits 17,414 Cost of sales 2,884,983 Interest expense 4,316 Depreciation and amortization 43,959 Selling, general and other expenses
14,291
Total expenses
2,964,963
Income from discontinued operations before income taxes
177,108
Income tax provision
47,045
Income from discontinued operations, net of income tax provision
National Beef's profitability is dependent, in large part, on the spread between
its cost for live cattle, the primary raw material for its business, and the
value received from selling boxed beef and other products, coupled with its
overall volume. National Beef operates in a large and liquid commodity market
and it does not have much influence over the price it pays for cattle or the
selling price it receives for the products it produces. National Beef's
profitability typically fluctuates seasonally, with relatively higher margins in
the spring and summer months and during times of ample cattle availability.
Throughout 2018, demand for beef and cattle supply remained strong, supporting
favorable margin conditions.
For further information, see Note 26 to our consolidated financial statements.
41
--------------------------------------------------------------------------------Selected Statement of Financial Condition Data
The tables below reconcile the balance sheet for each of our segments to our consolidated balance sheet (in thousands):
November 30, 2020
Investment
Banking and Asset Consolidation
Capital Markets Management Merchant Banking Corporate Adjustments Total
Assets
Cash and cash equivalents $ 7,102,004 $ 10,109 $ 212,668 $ 1,730,367 $ - $ 9,055,148
Cash and securities segregated
and on deposit for regulatory
purposes or deposited with
clearing and depository
organizations 604,321 - - - - 604,321
Financial instruments owned, at
fair value 15,249,686 2,534,860 340,031 - - 18,124,577
Loans to and investments in associated companies 995,730 148,005 542,828 - - 1,686,563 Securities borrowed 6,934,762 - - - - 6,934,762 Securities purchased under agreements to resell 5,096,769 - - - - 5,096,769 Securities received as collateral, at fair value 7,517 - - - - 7,517 Receivables 5,470,104 378,037 762,382 52 (1,808) 6,608,767 Property, equipment and leasehold improvements, net 847,108 8,121 30,670 11,305 -
897,204
Intangible assets, net and goodwill 1,721,277 143,310 48,880 - - 1,913,467 Other assets 805,848 8,617 1,235,605 436,975 (297,788) 2,189,257 Total assets 44,835,126 3,231,059 3,173,064 2,178,699 (299,596) 53,118,352 Liabilities Long-term debt (1) (2) 6,218,797 676,883 463,648 992,711 - 8,352,039 Other liabilities 32,752,740 1,758,373 727,088 239,507 (299,596) 35,178,112 Total liabilities 38,971,537 2,435,256 1,190,736 1,232,218 (299,596) 43,530,151 Redeemable noncontrolling interests - - 24,676 - -
24,676
Mandatorily redeemable convertible preferred shares - - - 125,000 - 125,000 Noncontrolling interests 712 16,677 17,243 - - 34,632Total Jefferies Financial Group Inc. shareholders' equity$ 5,862,877 $ 779,126 $ 1,940,409 $ 821,481 $ -$ 9,403,893 (1)Jefferies Group long-term debt of$6.9 billion atNovember 30, 2020 is allocated to Investment Banking and Capital Markets, and Asset Management segments based on an internal management view only and may not be reflective of what long-term debt would be on a stand-alone segment basis. (2) Long-term debt within Merchant Banking of$463.6 million atNovember 30, 2020 , primarily includes$236.8 million for real estate businesses,$97.9 million for Vitesse Energy Finance and$129.0 million forFoursight Capital . AtNovember 30, 2020 , Vitesse Energy Finance had$98.5 million drawn out of the maximum$120.0 million borrowing base on its credit facility andFoursight Capital had$129.3 million drawn out of the maximum$175.0 million credit commitment on its credit facilities. See Note 12 in our consolidated financial statements for additional information. 42 -------------------------------------------------------------------------------- November 30, 2019 Investment Banking and Asset Consolidation Capital Markets Management Merchant Banking Corporate Adjustments Total Assets Cash and cash equivalents$ 5,561,281 $ 25,255 $ 111,552$ 1,980,733 $ -$ 7,678,821 Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations 796,797 - - - - 796,797 Financial instruments owned, at fair value 13,735,641 2,681,034 363,237 115,829 -
16,895,741
Loans to and investments in associated companies 944,509 83,258 625,190 - - 1,652,957 Securities borrowed 7,624,642 - - - - 7,624,642 Securities purchased under agreements to resell 4,299,598 - - - - 4,299,598 Securities received as collateral, at fair value 9,500 - - - - 9,500 Receivables 4,560,760 369,410 813,675 261 - 5,744,106 Property, equipment and leasehold improvements, net 350,071 796 20,632 13,530 -
385,029
Intangible assets, net and goodwill 1,726,736 143,616 52,582 - - 1,922,934 Other assets 913,688 10,347 1,298,803 321,766 (94,495) 2,450,109 Total assets 40,523,223 3,313,716 3,285,671 2,432,119 (94,495) 49,460,234 Liabilities Long-term debt (1) (2) 6,289,015 714,343 342,325 991,378 - 8,337,061 Other liabilities 28,658,041 1,761,674 754,560 290,104 (94,495) 31,369,884 Total liabilities 34,947,056 2,476,017 1,096,885 1,281,482 (94,495) 39,706,945 Redeemable noncontrolling interests - - 26,605 - -
26,605
Mandatorily redeemable convertible preferred shares - - - 125,000 - 125,000 Noncontrolling interests 4,275 - 17,704 - - 21,979Total Jefferies Financial Group Inc. shareholders' equity$ 5,571,892 $ 837,699 $ 2,144,477 $ 1,025,637 $ -$ 9,579,705 (1)Jefferies Group long-term debt of$7.0 billion atNovember 30, 2019 is allocated to Investment Banking and Capital Markets, and Asset Management segments based on an internal management view only and may not be reflective of what long-term debt would be on a stand-alone segment basis. (2) Long-term debt within Merchant Banking of$342.3 million atNovember 30, 2019 , primarily includes$140.7 million for real estate businesses,$103.1 million for Vitesse Energy Finance and$98.3 million forFoursight Capital . AtNovember 30, 2019 , Vitesse Energy Finance had$104.0 million drawn out of the maximum$170.0 million borrowing base on its credit facility andFoursight Capital had$98.7 million drawn out of the maximum$175.0 million credit commitment on its credit facilities. See Note 12 in our consolidated financial statements for additional information. 43 -------------------------------------------------------------------------------- The table below presents our capital by significant business and investment (in thousands): November 30, 2020 November 30, 2019 Jefferies Group $
6,407,954
Assets held on behalf of Asset Management (excluding Jefferies Group) 234,049 227,908 Merchant Banking: Oil and gas 526,642 585,493 Real estate 531,553 645,328 Linkem 198,991 194,847 FXCM 133,375 129,343 Idaho Timber 85,595 77,914 WeWork 10,833 53,798 Investments in public companies 192,363 178,593 Other 261,057 279,161 Total Merchant Banking 1,940,409 2,144,477
Corporate liquidity and other assets, net of Corporate liabilities including long-term debt
821,481 1,025,637 Total Capital$ 9,403,893 $ 9,579,705 Liquidity and Capital Resources Parent Company Liquidity Our strategy focuses on strengthening and expanding our core businesses of Investment Banking and Capital Markets and Asset Management, while continuing to simplify our structure and return capital to our shareholders. We are simplifying our structure through a managed transformation of Merchant Banking, which to date has included divestitures, special distributions to shareholders of assets, as well as transfers of financial assets out of our Merchant Banking portfolio and intoJefferies Group . We anticipate additional transactions as our transformation is completed. Some of these transactions have generated significant excess liquidity; some of these transactions have also reduced the future receipt of periodic distributions from subsidiaries to the parent company. Parent company liquidity, which includes cash and investments that are easily convertible into cash within a relatively short period of time total$1,884.7 million atNovember 30, 2020 , and are primarily comprised of cash, prime and government money market funds and other publicly traded securities. These are classified in our Consolidated Statement of Financial Condition as cash and cash equivalents and financial instruments owned, at fair value. AtNovember 30, 2020 ,$1,551.7 million of this amount is invested inU.S. government money funds that invest at least 99.5% of its total assets in cash, securities issued by theU.S. government andU.S. government-sponsored entities and repurchase agreements that are fully collateralized by cash or government securities. During the twelve months endedNovember 30, 2020 , our parent company received cash distributions of$733.5 million from our subsidiary businesses, including$581.7 million fromJefferies Group . We also received$303.4 million from divestitures and repayments of advances. Our recurring cash requirements, including the payment of interest on our parent company debt, dividends and corporate cash overhead expenses, aggregate approximately$309.7 million on an annual basis. Dividends paid during the twelve months endedNovember 30, 2020 of$160.9 million include quarterly dividends of$0.15 per share. OnJanuary 4, 2021 , our Board of Directors increased our quarterly dividend by 33% to$0.20 per share. The payment of dividends is subject to the discretion of our Board of Directors and depends upon general business conditions, legal and contractual restrictions on the payment of dividends and other factors that our Board of Directors may deem to be relevant. For many years, we benefited from federal net operating loss carryovers ("NOLs") which substantially offset our federal cash tax requirements. As a result of full utilization of our federal NOLs and other tax attributes, we expect to incur federal cash tax liabilities in 2021. 44 -------------------------------------------------------------------------------- Our primary long-term parent company cash requirement is our$1.0 billion principal outstanding as ofNovember 30, 2020 under our long-term debt, of which$750.0 million is due in 2023 and$250.0 million in 2043. As we generate excess liquidity, we evaluate the best use of the proceeds, which may include reductions to existing debt, share repurchases, special dividends, investments in our businesses, or any of a number of other options available to us. Shares Outstanding AtNovember 30, 2019 , we had approximately$203.6 million available for future share repurchases, based on the closing price of Jefferies common shares onNovember 30, 2019 . InJanuary 2020 , the Board of Directors approved an additional$250.0 million share repurchase authorization. InMarch 2020 , having completed the repurchase of shares under the previous authorization, the Board of Directors approved an additional share repurchase authorization of$100 million . InJune 2020 , the Board of Directors increased the share repurchase authorization by$176.7 million to$250.0 million . InSeptember 2020 , the Board of Directors increased the share repurchase authorization by$128.0 million to$250.0 million . During the twelve months endedNovember 30, 2020 , we purchased a total of 42,134,910 of our common shares for$812.7 million , or an average price per share of$19.29 . AtNovember 30, 2020 , we have approximately$57.2 million available for future repurchases. InJanuary 2021 , the Board of Directors increased the share repurchase authorization to$250.0 million , including the$57.2 million . AtNovember 30, 2020 , we had outstanding 249,750,542 common shares and 23,868,000 share-based awards that do not require the holder to pay any exercise price (potentially an aggregate of 273,618,542 outstanding common shares if all awards become outstanding common shares). The 23,868,000 share-based awards include the target number of shares under the senior executive award plan, which is more fully discussed in Note 15. Concentration and Liquidity Targets From time to time in the past, we have accessed public and private credit markets and raised capital in underwritten bond financings. The funds raised have been used by us for general corporate purposes, including for our existing businesses and new investment opportunities. In addition, the ratings of Jefferies are a factor considered by rating agencies that rate the debt of our subsidiary companies, includingJefferies Group , whose access to external financing is important to its day to day operations. Ratings issued by bond rating agencies, subject to change at any time, are as follows: Rating Outlook Moody's Investors Service (1) Baa3 Stable Standard and Poor's (2) BBB Stable Fitch Ratings BBB Stable (1) OnApril 15, 2020 , Moody's Investors Service affirmed our rating of Baa3 and rating outlook of stable. (2) OnOctober 29, 2020 , Standard and Poor's affirmed our rating of BBB and revised our rating outlook from negative to stable. We target specific concentration and liquidity principles, although there is no legal requirement to do so. Concentration Target: As a diversification measure, we limit cash investments such that our single largest investment does not exceed 20% of equity excludingJefferies Group , and that our next largest investment does not exceed 10% of equity excludingJefferies Group , in each case measured at the time the investment was made. On this basis,Linkem is our largest investment excludingJefferies Group and Vitesse Energy Finance is our next largest investment excludingJefferies Group . There were no investments made during the year that approached 10% of equity excludingJefferies Group . Liquidity Target: We hold a parent company liquidity reserve calculated as a minimum of twenty-four months of holding company expenses (excluding non-cash components), parent company interest, and dividends. Maturities of parent company debt within the upcoming year are also included in the target; however, our next maturity is during 2023 so there is no current inclusion. November 30, 2020 Liquidity reserve (in thousands): Minimum reserve under liquidity target $ 619,400 Actual liquidity$ 1,884,650 45
-------------------------------------------------------------------------------- Consolidated Statements of Cash Flows As discussed above, we have historically relied on our available liquidity to meet short-term and long-term needs, and to make acquisitions of new businesses and investments. Except as otherwise disclosed herein, our operating businesses do not generally require significant funds to support their operating activities. The mix of our operating businesses and investments can change frequently as a result of acquisitions or divestitures, the timing of which is impossible to predict but which often have a significant impact on the Consolidated Statements of Cash Flows in any one period. Further, the timing and amounts of distributions from investments in associated companies may be outside our control. As a result, reported cash flows from operating, investing and financing activities do not generally follow any particular pattern or trend, and reported results in the most recent period should not be expected to recur in any subsequent period.
The following table provides a summary of our cash flows (in thousands):
Twelve Months Twelve Months Eleven Months
Ended November Ended November Ended November
30, 2020 30, 2019 30, 2018
Cash, cash equivalents and restricted cash at
beginning of period $ 8,480,435 $ 6,012,662 $ 5,774,505
Net cash provided by (used for) operating
activities 2,075,948 (827,837) 691,103
Net cash provided by (used for) investing
activities (186,192) 1,707,095 142,443
Net cash provided by (used for) financing
activities (723,525) 1,589,578 (575,843)
Effect of foreign exchange rate changes on cash,
cash equivalents
and restricted cash 18,306 (1,063) (19,546)
Cash, cash equivalents and restricted cash at
end of period $ 9,664,972 During the twelve months endedNovember 30, 2020 , net cash provided by operating activities primarily relates to funds provided byJefferies Group of$1,870.9 million . Net losses related to property and equipment, and other assets includes the non-cash charge of$61.0 million to write down the value of certain of our assets during the twelve months endedNovember 30, 2020 . During the twelve months endedNovember 30, 2019 , net cash used for operating activities primarily relates to funds used byJefferies Group of$1,187.1 million . We also received distributions of$318.2 million from National Beef in 2019. Net gains related to real estate, property and equipment, and other assets for 2019 include the non-cash pre-tax gain of$72.1 million recognized in connection with the acquisition of the remaining interest ofHomeFed . During the twelve months endedNovember 30, 2020 , net cash used for investing activities principally reflects$1,690.6 million of loans to and investments in associated companies and$813.9 million for advances on notes, loans and other receivables, partially offset by$1,556.0 million of capital distributions and loan repayments from associated companies and$686.1 million of collections on notes, loans and other receivables. During the twelve months endedNovember 30, 2019 , net cash provided by investing activities includes proceeds from sale of associated companies, primarily related to our sale of our investment in National Beef. Additionally, cash provided by investing activities for 2019 includes proceeds from maturities of investments of$531.1 million and proceeds from sales of investments of$913.2 million .Jefferies Group used funds of$124.4 million for investing activities in 2019. During the twelve months endedNovember 30, 2020 , net cash used for financing activities primarily relates to funds used to repurchase common shares for treasury of$816.9 million and funds used to pay dividends of$160.9 million . This was partially offset by funds provided byJefferies Group of$215.5 million , including funds provided by the issuance of debt of$2,789.5 million and proceeds from other secured financings of$305.9 million , partially offset by funds used for the repayment of debt of$2,863.0 million . During the twelve months endedNovember 30, 2019 , net cash provided by financing activities primarily relates to funds provided byJefferies Group of$2,167.4 million . This includes funds provided by the issuance of debt of$2,972.1 million and proceeds from other secured financings of$1,586.3 million , partially offset by funds used for the repayments of debt of$2,421.6 million . Net cash provided by financing activities for 2019 also includes funds used to repurchase common shares for treasury of$509.9 million and funds used to pay dividends of$149.6 million . 46 --------------------------------------------------------------------------------
The following below provides information about our contractual obligations at
Expected Maturity Date
2023 2025
and and
Contractual Obligations Total 2021 2022 2024 2026 After 2026
(In millions)
Long-term debt $ 8,234.9 $ 350.4 $ 69.8 $ 2,340.9 $ 117.8 $ 5,356.0
Estimated interest payments on
debt 3,611.4 359.4 345.5 548.4 490.6 1,867.5
Operating leases 686.9 72.4 77.0 130.6 122.5 284.4
Other 694.4 326.0 175.3 123.4 46.5 23.2
Total contractual obligations $ 13,227.6 $ 1,108.2 Amounts related to ourU.S. pension obligations ($46.4 million ) are not included in the above table as the timing of payments is uncertain; however, we do expect to make$8.0 million of contributions to these plans in 2021. For further information, see Note 17 in our consolidated financial statements. In addition, the above amounts do not include liabilities for unrecognized tax benefits as the timing of payments, if any, is uncertain. Such amounts aggregated$401.4 million atNovember 30, 2020 ; for more information, see Note 19 in our consolidated financial statements. OurU.S. pension obligations relate to frozen defined benefit pension plans, principally the defined benefit plan ofWilTel Communications Group, LLC ("WilTel"), our former telecommunications subsidiary. When we soldWilTel in 2005, its defined benefit pension plan was not transferred in connection with the sale. AtNovember 30, 2020 , we had recorded a liability of$38.0 million in our Consolidated Statement of Financial Condition forWilTel's unfunded defined benefit pension plan obligation. This amount represents the difference between the present value of amounts owed to former employees ofWilTel (referred to as the projected benefit obligation) and the market value of plan assets set aside in segregated trust accounts. Since the benefits in this plan have been frozen, future changes to the unfunded benefit obligation are expected to principally result from benefit payments, changes in the market value of plan assets, differences between actuarial assumptions and actual experience and interest rates. Calculations of pension expense and projected benefit obligations are prepared by actuaries based on assumptions provided by management. These assumptions are reviewed on an annual basis, including assumptions about discount rates, interest credit rates and expected long-term rates of return on plan assets. The timing of expected future benefit payments was used in conjunction with the Citigroup Pension Discount Curve to develop a discount rate for theWilTel plan that is representative of the high quality corporate bond market. Holding all other assumptions constant, a 0.25% change in the discount rate would affect pension expense in 2021 by$0.1 million and the benefit obligation by$6.4 million , of which$4.7 million relates to theWilTel plan. The deferred losses in accumulated other comprehensive income (loss) have not yet been recognized as components of net periodic pension cost in the Consolidated Statements of Operations ($57.3 million atNovember 30, 2020 ). These deferred amounts primarily result from differences between the actual and assumed return on plan assets and changes in actuarial assumptions, including changes in discount rates and changes in interest credit rates. They are amortized to expense if they exceed 10% of the greater of the projected benefit obligation or the market value of plan assets as of the beginning of the year. The estimated net loss that will be amortized from accumulated other comprehensive income (loss) into pension expense in 2021 is$3.6 million . The assumed long-term rates of return on plan assets are based on the investment objectives of the plans, which are more fully discussed in Note 17 in our consolidated financial statements. Jefferies Group Liquidity General The Chief Financial Officer and Global Treasurer ofJefferies Group are responsible for developing and implementing liquidity, funding and capital management strategies forJefferies Group . These policies are determined by the nature and needs of day to day business operations, business opportunities, regulatory obligations and liquidity requirements. 47 -------------------------------------------------------------------------------- The actual levels of capital, total assets and financial leverage are a function of a number of factors, including asset composition, business initiatives and opportunities, regulatory requirements and cost and availability of both long-term and short-term funding.Jefferies Group has historically maintained a balance sheet consisting of a large portion of total assets in cash and liquid marketable securities, arising principally from traditional securities brokerage and trading activity. The liquid nature of these assets provides flexibility in financing and managing our business.Jefferies Group maintains modest leverage to support its investment grade ratings. The growth of its balance sheet is supported by its equity and we have quantitative metrics in place to monitor leverage and double leverage.Jefferies Group capital plan is robust, in order to sustain its operating model through stressed conditions. We maintain adequate financial resources to support business activities in both normal and stressed market conditions, including a buffer in excess of regulatory, or other internal or external, requirements.Jefferies Group's access to funding and liquidity is stable and efficient to ensure that there is sufficient liquidity to meet its financial obligations in normal and stressed market conditions. A business unit level balance sheet and cash capital analysis are prepared and reviewed with senior management on a weekly basis. As a part of this balance sheet review process, capital is allocated to all assets and gross balance sheet limits are adjusted, as necessary. This process ensures that the allocation of capital and costs of capital are incorporated into business decisions. The goals of this process are to protect the firm's platform, enable the businesses to remain competitive, maintain the ability to manage capital proactively and hold businesses accountable for both balance sheet and capital usage. We actively monitor and evaluate our financial condition and the composition of assets and liabilities. The overall securities inventory is continually monitored, including the inventory turnover rate, which confirms the liquidity of overall assets. Substantially all ofJefferies Group's financial instruments are valued on a daily basis and we monitor and employ balance sheet limits for its various businesses. AtNovember 30, 2020 , our Consolidated Statement of Financial Condition includesJefferies Group's Level 3 financial instruments owned, at fair value that are approximately 2% of total financial instruments owned, at fair value. Securities financing assets and liabilities include financing for financial instruments trading activity, matched book transactions and mortgage finance transactions. Matched book transactions accommodate customers, as well as obtain securities for the settlement and financing of inventory positions. The following table presents period end balance, average balance and maximum balance at any month end within the periods presented for Securities purchased under agreements to resell and Securities sold under agreements to repurchase (in millions): 2020 2019 Securities purchased under agreements to resell: Period end$ 5,097 $ 4,300 Month end average 8,040 7,762 Maximum month end 12,061 11,589 Securities sold under agreements to repurchase: Period end$ 8,316 $ 7,505 Month end average 13,501 14,686 Maximum month end 18,979 19,654 Fluctuations in the balance of repurchase agreements from period to period and intraperiod are dependent on business activity in those periods. Additionally, the fluctuations in the balances of securities purchased under agreements to resell are influenced in any given period by our clients' balances and our clients' desires to execute collateralized financing arrangements via the repurchase market or via other financing products. Average balances and period end balances will fluctuate based on market and liquidity conditions and we consider the fluctuations intraperiod to be typical for the repurchase market. Liquidity Management The key objectives ofJefferies Group's liquidity management framework are to support the successful execution of its business strategies while ensuring sufficient liquidity through the business cycle and during periods of financial distress. The liquidity management policies are designed to mitigate the potential risk that adequate financing may not be accessible to service financial obligations without material franchise or business impact. 48 -------------------------------------------------------------------------------- The principal elements ofJefferies Group's liquidity management framework are the Contingency Funding Plan, the Cash Capital Policy and the assessment of Modeled Liquidity Outflow. Contingency Funding Plan.Jefferies Group's Contingency Funding Plan is based on a model of a potential liquidity contraction over a one year time period. This incorporates potential cash outflows during a liquidity stress event, including, but not limited to, the following: •Repayment of all unsecured debt maturing within one year and no incremental unsecured debt issuance; •Maturity rolloff of outstanding letters of credit with no further issuance and replacement with cash collateral; •Higher margin requirements than currently exist on assets on securities financing activity, including repurchase agreements; •Liquidity outflows related to possible credit downgrade; •Lower availability of secured funding; •Client cash withdrawals; •The anticipated funding of outstanding investment and loan commitments; and •Certain accrued expenses and other liabilities and fixed costs. Cash Capital Policy. A cash capital model is maintained that measures long-term funding sources against requirements. Sources of cash capital include equity and the noncurrent portion of long-term borrowings. Uses of cash capital include the following: •Illiquid assets such as equipment, goodwill, net intangible assets, exchange memberships, deferred tax assets and certain investments; •A portion of securities inventory that is not expected to be financed on a secured basis in a credit stressed environment (i.e., margin requirements); and •Drawdowns of unfunded commitments. To ensure that inventory does not need to be liquidated in the event of a funding crisis, we seek to maintain surplus cash capital, which is reflected in the leverage ratiosJefferies Group maintains.Jefferies Group's total long-term capital of$13.0 billion atNovember 30, 2020 exceeded its cash capital requirements. Modeled Liquidity Outflow.Jefferies Group's businesses are diverse, and liquidity needs are determined by many factors, including market movements, collateral requirements and client commitments, all of which can change dramatically in a difficult funding environment. During a liquidity crisis, credit-sensitive funding, including unsecured debt and some types of secured financing agreements, may be unavailable, and the terms (e.g., interest rates, collateral provisions and tenor) or availability of other types of secured financing may change. As a result ofJefferies Group's policy to ensure it has sufficient funds to cover estimates of what may be needed in a liquidity crisis,Jefferies Group holds more cash and unencumbered securities and has greater long-term debt balances than the businesses would otherwise require. As part of this estimation process, we calculate a Modeled Liquidity Outflow that could be experienced in a liquidity crisis. Modeled Liquidity Outflow is based on a scenario that includes both a market-wide stress and firm-specific stress. Based on the sources and uses of liquidity calculated under the Modeled Liquidity Outflow scenarios, we determine, based on a calculated surplus or deficit, additional long-term funding that may be needed versus funding through the repurchase financing market and consider any adjustments that may be necessary toJefferies Group's inventory balances and cash holdings. AtNovember 30, 2020 ,Jefferies Group had sufficient excess liquidity to meet all contingent cash outflows detailed in the Modeled Liquidity Outflow. We regularly refine our model to reflect changes in market or economic conditions and the firm's business mix. 49 -------------------------------------------------------------------------------- Sources of LiquidityWithin Jefferies Group , the following are financial instruments that are cash and cash equivalents or are deemed by management to be generally readily convertible into cash, marginable or accessible for liquidity purposes within a relatively short period of time, as reflected in the Consolidated Statements of Financial Condition (in thousands): Average Balance November 30, Fourth Quarter November 30, 2020 2020 (1) 2019 Cash and cash equivalents: Cash in banks$ 1,979,058 $ 2,777,480 $ 983,816 Money market investments (2) 5,132,871 4,044,718 4,584,087 Total cash and cash equivalents 7,111,929 6,822,198 5,567,903 Other sources of liquidity: Debt securities owned and securities purchased under agreements to resell (3) 1,180,410 1,074,927 972,624 Other (4) 312,511 306,911 377,296 Total other sources 1,492,921 1,381,838 1,349,920 Total cash and cash equivalents and other liquidity sources$ 8,604,850 $ 8,204,036 $ 6,917,823 (1)Average balances are calculated based on weekly balances. (2)AtNovember 30, 2020 and 2019,$5,118.0 million and$4,496.7 million , respectively, was invested inU.S. government money funds that invest at least 99.5% of its total assets in cash, securities issued by theU.S. government andU.S. government-sponsored entities, and repurchase agreements that are fully collateralized by cash or government securities. The remaining$14.9 million and$87.4 million atNovember 30, 2020 and 2019, respectively, are invested in AAA rated prime money funds. The average balance ofU.S. government money funds for the quarter endedNovember 30, 2020 was$4,030.2 million . (3)Consists of high quality sovereign government securities and reverse repurchase agreements collateralized byU.S. government securities and other high quality sovereign government securities; deposits with a central bank within the EEA,Canada ,Australia ,Japan ,Switzerland or theU.S. ; and securities issued by a designated multilateral development bank and reverse repurchase agreements with underlying collateral comprised of these securities. (4)Other includes unencumbered inventory representing an estimate of the amount of additional secured financing that could be reasonably expected to be obtained from financial instruments owned that are currently not pledged after considering reasonable financing haircuts. In addition to the cash balances and liquidity pool presented above, the majority of financial instruments (both long and short) in our trading accounts are actively traded and readily marketable. AtNovember 30, 2020 , repurchase financing can be readily obtained for approximately 71.0% ofJefferies Group's inventory at haircuts of 10% or less, which reflects the liquidity of the inventory. In addition, as a matter of our policy, all of these assets have internal capital assessed, which is in addition to the funding haircuts provided in the securities finance markets. Additionally, certain ofJefferies Group's financial instruments owned primarily consisting of bank loans, consumer loans and investments are predominantly funded byJefferies Group's long-term capital. UnderJefferies Group's cash capital policy, capital allocation levels are modeled that are more stringent than the haircuts used in the market for secured funding; and surplus capital is maintained at these more stringent levels. We continually assess the liquidity ofJefferies Group's inventory based on the level at whichJefferies Group could obtain financing in the marketplace for a given asset. Assets are considered to be liquid if financing can be obtained in the repurchase market or the securities lending market at collateral haircut levels of 10% or less. 50 -------------------------------------------------------------------------------- The following summarizesJefferies Group's financial instruments owned by asset class that are considered to be of a liquid nature and the amount of such assets that have not been pledged as collateral as reflected in the Consolidated Statements of Financial Condition (in thousands): November 30, 2020 November 30, 2019 Unencumbered Unencumbered Liquid Financial Liquid Financial Liquid Financial Liquid Financial Instruments Instruments (2) Instruments Instruments (2) Corporate equity securities$ 2,191,536 $ 238,129$ 2,403,589 $ 256,624 Corporate debt securities 2,298,591 50,217 1,893,605 29,412U.S. Government , agency and municipal securities 3,336,361 110,586 2,894,264 151,414 Other sovereign obligations 2,518,928 1,101,272 2,633,636 969,800 Agency mortgage-backed securities (1) 1,652,743 - 1,757,077 - Loans and other receivables 564,112 - 655,120 - Total$ 12,562,271 $ 1,500,204 $ 12,237,291 $ 1,407,250 (1)Consists solely of agency mortgage-backed securities issued by Freddie Mac, Fannie Mae andGinnie Mae . These securities include pass-through securities, securities backed by adjustable rate mortgages, collateralized mortgage obligations, commercial mortgage-backed securities and interest- and principal-only securities. (2)Unencumbered liquid balances represent assets that can be sold or used as collateral for a loan, but have not been. In addition to being able to be readily financed at modest haircut levels, it is estimated that each of the individual securities within each asset class above could be sold into the market and converted into cash within three business days under normal market conditions, assuming that the entire portfolio of a given asset class was not simultaneously liquidated. There are no restrictions on the unencumbered liquid securities, nor have they been pledged as collateral. Sources ofFunding and Capital Resources Jefferies Group's assets are funded by equity capital, senior debt, securities loaned, securities sold under agreements to repurchase, customer free credit balances, bank loans and other payables. Secured Financing Readily available secured funding is used to financeJefferies Group's inventory of financial instruments.Jefferies Group's ability to support increases in total assets is largely a function of the ability to obtain short and intermediate-term secured funding, primarily through securities financing transactions. Repurchase or reverse repurchase agreements (collectively "repos"), respectively, are used to finance a portion of long inventory and cover some of short inventory by pledging and borrowing securities. AtNovember 30, 2020 , approximately 60.1% ofJefferies Group's cash and noncash repurchase financing activities used collateral that was considered eligible collateral by central clearing corporations. During the year endedNovember 30, 2020 , an average of approximately 87.7% ofJefferies Group's cash and noncash repurchase financing activities used collateral that was considered eligible collateral by central clearing corporations. Central clearing corporations are situated between participating members who borrow cash and lend securities (or vice versa); accordingly, repo participants contract with the central clearing corporation and not one another individually. Therefore, counterparty credit risk is borne by the central clearing corporation which mitigates the risk through initial margin demands and variation margin calls from repo participants. The comparatively large proportion ofJefferies Group's total repo activity that is eligible for central clearing reflects the high quality and liquid composition of the inventoryJefferies Group carries in its trading books. For those asset classes not eligible for central clearing house financing,Jefferies Group seeks to execute its bi-lateral financings on an extended term basis and the tenor ofJefferies Group's repurchase and reverse repurchase agreements generally exceeds the expected holding period of the assetsJefferies Group is financing. The weighted average maturity of cash and noncash repurchase agreements for non-clearing corporation eligible funded inventory is approximately five months atNovember 30, 2020 .Jefferies Group's ability to finance its inventory via central clearinghouses and bi-lateral arrangements is augmented byJefferies Group's ability to draw bank loans on an uncommitted basis under its various banking arrangements. AtNovember 30, 2020 , short-term borrowings, which must be repaid within one year or less and include bank loans and overdrafts, borrowings under revolving credit facilities, floating rate puttable notes and equity-linked notes, totaled$764.7 million . Interest under the bank 51 -------------------------------------------------------------------------------- lines is generally at a spread over the federal funds rate. Letters of credit are used in the normal course of business mostly to satisfy various collateral requirements in favor of exchanges in lieu of depositing cash or securities. Average daily short-term borrowings outstanding forJefferies Group were$656.3 million and$555.4 million for 2020 and 2019, respectively.Jefferies Group's short-term borrowings include facilities that contain certain covenants that, among other things, require it to maintain a specified level of tangible net worth and impose certain restrictions on the future indebtedness of certain of its subsidiaries that are borrowers. AtNovember 30, 2020 ,Jefferies Group was in compliance with all covenants under these facilities.Jefferies Group's facilities included within short-term borrowings atNovember 30, 2020 were as follows (in thousands):
246,000
Royal Bank of Canada Credit Facility (3) 200,000
Bank of New York Mellon Credit Facility (4) -
Total $ 746,000
(1) Interest is generally based at spreads over the Federal Funds Rate as
defined in this master loan agreement.
(2) Interest is based on an annual alternative base rate or an adjusted LIBOR,
as defined in this credit facility agreement.
(3) Interest is based on a rate per annum equal to LIBOR plus an applicable
margin of 2.05%.
(4) During 2020, Jefferies LLC entered into a revolving credit facility with
the Bank of New York Mellon for a committed amount of $100.0 million , maturing
on September 13, 2021 . Interest is based on a rate per annum equal to the
Federal Funds Rate plus 2%. At November 30, 2020 , there were no borrowings
outstanding under this agreement.
In addition, the Bank of New York Mellon has agreed to make revolving intraday
credit advances ("Jefferies Group Intraday Credit Facility") for an aggregate
committed amount of $150.0 million . The Jefferies Group Intraday Credit Facility
is structured so that advances are generally repaid before the end of each
business day. However, if an advance is not repaid by the end of any business
day, the advance is converted to an overnight loan. Intraday loans accrue
interest at a rate of 0.12%. Interest is charged based on the number of minutes
in a day the advance is outstanding. Overnight loans are charged interest at the
base rate plus 3% on a daily basis. The base rate is the higher of the federal
funds rate plus 0.50% or the prime rate in effect at that time. The Intraday
Credit Facility contains financial covenants, which include a minimum regulatory
net capital requirement for Jefferies Group's U.S. broker-dealer, Jefferies LLC .
At November 30, 2020 , Jefferies Group was in compliance with all debt covenants
under the Jefferies Group Intraday Credit Facility.
In addition to the above financing arrangements, Jefferies Group issues notes
backed by eligible collateral under a master repurchase agreement, which
provides an additional financing source for its inventory ("repurchase agreement
financing program"). The notes issued under the program are presented within
Other secured financings in the Consolidated Statements of Financial Condition.
At November 30, 2020 , the outstanding notes were $2.7 billion , bear interest at
a spread over LIBOR and mature from December 2020 to August 2022 .
Long-Term Debt
Jefferies Group's long-term debt reflected in the Consolidated Statement of
Financial Condition at November 30, 2020 is $6.9 billion . Jefferies Group's
long-term debt, excluding its revolving credit facility and the secured bank
loan, has a weighted average maturity of approximately 10.8 years.
During the twelve months ended November 30, 2020 , Jefferies Group's 2.375% Euro
Medium Term Notes matured and were repaid, and its 6.875% Senior Notes due 2021
were retired early. Additionally, during the twelve months ended November 30,
2020 , Jefferies Group issued structured notes with a total principal amount of
approximately $325.5 million , net of retirements, an additional $150.0 million
principal amount of 5.125% Senior Notes due 2023 and $500.0 million principal
amount of 2.75% Senior Notes due 2032. At November 30, 2020 , all of Jefferies
Group's structured notes contain various interest rate payment terms and are
accounted for at fair value, with changes in fair value resulting from a change
in the instrument specific credit risk presented in Accumulated other
comprehensive income (loss) and changes in fair value resulting from non-credit
components recognized in Principal transactions revenue. The fair value of all
of Jefferies Group's structured notes at November 30, 2020 was $1,712.2 million
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Jefferies Group has a Revolving Credit Facility ("Jefferies Group Revolving
Credit Facility") with a group of commercial banks for an aggregate principal
amount of $190.0 million . At November 30, 2020 , borrowings under the Jefferies
Group Revolving Credit Facility amounted to $189.7 million . Interest is based on
an annual alternative base rate or an adjusted LIBOR, as defined in the
Jefferies Group Revolving Credit Facility agreement. The Jefferies Group
Revolving Credit Facility contains certain covenants that, among other things,
requires Jefferies Group LLC to maintain specified level of tangible net worth
and liquidity amounts, and imposes certain restrictions on future indebtedness
of and requires specified levels of regulated capital for certain of its
subsidiaries. Throughout the year and at November 30, 2020 , no instances of
noncompliance with the Jefferies Group Revolving Credit Facility covenants
occurred and we expect to remain in compliance given our current liquidity and
anticipated funding requirements given our business plan and profitability
expectations.
One of Jefferies Group's subsidiaries has a Loan and Security Agreement with a
bank for a term loan with a principal amount of $50.0 million ("Jefferies Group
Secured Bank Loan "). This Jefferies Group Secured Bank Loan matures on September
27, 2021 and is collateralized by certain trading securities. Interest on the
Jefferies Group Secured Bank Loan is 1.25% plus LIBOR. The agreement contains
certain covenants that, among other things, restrict lien or encumbrance upon
any of the pledged collateral. At November 30, 2020 , we were in compliance with
all covenants under the Jefferies Group Loan and Security Agreement.
Jefferies Group's long-term debt ratings are as follows:
Rating Outlook
Moody's Investors Service (1) Baa3 Stable
Standard and Poor's (2) BBB Stable
Fitch Ratings BBB Stable
(1) On April 15, 2020 , Moody's Investors Service affirmed Jefferies Group's
rating of Baa3 and rating outlook of stable.
(2) On October 29, 2020 , Standard and Poor's affirmed Jefferies Group's rating
of BBB and revised its rating outlook from negative to stable.
Jefferies Group's access to external financing to finance its day to day
operations, as well as the cost of that financing, is dependent upon various
factors, including its debt ratings. Jefferies Group's current debt ratings are
dependent upon many factors, including industry dynamics, operating and economic
environment, operating results, operating margins, earnings trend and
volatility, balance sheet composition, liquidity and liquidity management,
capital structure, overall risk management, business diversification and market
share and competitive position in the markets in which it
operates. Deterioration in any of these factors could impact Jefferies Group's
credit ratings. While certain aspects of a credit rating downgrade are
quantifiable pursuant to contractual provisions, the impact on business and
trading results in future periods is inherently uncertain and depends on a
number of factors, including the magnitude of the downgrade, the behavior of
individual clients and future mitigating action taken by us.
In connection with certain over-the-counter derivative contract arrangements and
certain other trading arrangements, we may be required to provide additional
collateral to counterparties, exchanges and clearing organizations in the event
of a credit rating downgrade. At November 30, 2020 , the amount of additional
collateral that could be called by counterparties, exchanges and clearing
organizations under the terms of such agreements in the event of a downgrade of
Jefferies Group's long-term credit rating below investment grade was $102.9
million . For certain foreign clearing organizations, credit rating is only one
of several factors employed in determining collateral that could be called. The
above represents management's best estimate for additional collateral to be
called in the event of a credit rating downgrade. The impact of additional
collateral requirements is considered in Jefferies Group's Contingency Funding
Plan and calculation of Modeled Liquidity Outflow, as described above.
Ratings issued by credit rating agencies are subject to change at any time.
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Net Capital
Jefferies Group operates a broker-dealer, Jefferies LLC , registered with the SEC
and member firms of FINRA . Jefferies LLC is subject to the SEC Uniform Net
Capital Rule ("Rule 15c3-1"), which requires the maintenance of minimum net
capital and has elected to calculate minimum capital requirements using the
alternative method permitted by Rule 15c3-1 in calculating net capital.
Jefferies LLC , as a dually-registered U.S. broker-dealer and FCM, is also
subject to Rule 1.17 of the CFTC, which sets forth minimum financial
requirements. The minimum net capital requirement in determining excess net
capital for a dually-registered U.S. broker-dealer and FCM is equal to the
greater of the requirement under Rule 15c3-1 or CFTC Rule 1.17. Jefferies LLC's
net capital and excess net capital at November 30, 2020 were $2,161.3 million
and $2,060.5 million , respectively. FINRA is the designated examining authority
for Jefferies LLC and the NFA is the designated self-regulatory organization for
Jefferies LLC as an FCM.
Certain other U.S. and non-U.S. subsidiaries of Jefferies Group are subject to
capital adequacy requirements as prescribed by the regulatory authorities in
their respective jurisdictions, including Jefferies International Limited which
is subject to the regulatory supervision and requirements of the Financial
Conduct Authority in the U.K. The Dodd-Frank Act was signed into law on July 21,
2010 . The Dodd-Frank Act contains provisions that require the registration of
all swap dealers, major swap participants, security-based swap dealers, and/or
major security-based swap participants. The CFTC has finalized rules
establishing capital requirements and financial reporting requirements for CFTC
registered swap dealers not subject to regulation by a banking regulator. We
expect that these provisions will result in modifications to the regulatory
capital requirements of some of Jefferies Group's entities, and will result in
some of Jefferies Group's other entities becoming subject to regulatory capital
requirements for the first time, including Jefferies Financial Services, Inc. ,
which registered as a swap dealer with the CFTC during January 2013 and
Jefferies Financial Products LLC , which registered during August 2014 . Jefferies
Group may also be required in the future to register one or more additional
subsidiaries as security-based swap dealers with the SEC . Compliance with these
rules is required by October 6, 2021 .
The regulatory capital requirements referred to above may restrict
Some of our other consolidated subsidiaries also have credit agreements which may restrict the payment of cash dividends, or the ability to make loans or advances to the parent company.
Other Developments
TheU.K. left the EU onJanuary 31, 2020 and the current transition period ended onDecember 31, 2020 . OnJanuary 1, 2021 ,Jefferies Group's U.K. broker dealer,Jefferies International Limited , is no longer able to provide services to European clients under the passport regime.Jefferies Group has taken steps to ensure its ability to provide services to its European clients without interruption by establishing a wholly-owned subsidiary inGermany ("JefferiesGmbH "), which is authorized and regulated inGermany by theFederal Financial Services Authority ("BaFin"). European clients have been migrated toJefferies GmbH to conduct business across all ofJefferies Group's European investment banking, fixed income and equity platforms. During 2020,Jefferies Group's European branches inAmsterdam ,Madrid ,Milan ,Paris andStockholm were migrated andJefferies Group increased its local employees, equity capital and established clearing relationships. Central banks and regulators around the world have convened working groups to find, and implement the transition to, suitable replacements for IBORs.Jefferies Group has an active transition program that focuses on an orderly transition from IBORs to alternative reference rates, including internal operational readiness and risk management.Jefferies Group is identifying, assessing and monitoring risk associated with the expected discontinuation of IBORs, which includes taking steps to update operational processes and models and evaluation legacy contracts for any changes that may be required. 54 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements AtNovember 30, 2020 , our commitments and guarantees, substantially all of which related toJefferies Group , are as follows: Expected Maturity Date 2023 2025 and and Commitments and Guarantees Total 2021 2022 2024 2026 After 2026 (In millions) Equity commitments$ 465.5 $ 365.5 $ 53.4 $ 25.3 $ 14.5 $ 6.8 Loan commitments 286.8 249.5 10.0 25.0 2.3 - Underwriting commitments 243.3 243.3 - - - - Forward starting reverse repos 6,048.0 6,048.0 - - - - Forward starting repos 3,488.7 3,488.7 - - - - Other unfunded commitments 186.8 156.6 25.0 5.2 - - Derivative contracts (1): Non-credit related 21,246.5 12,607.6
2,475.8 5,760.8 390.4 11.9
Credit related 6.4 - - 6.4 - -
Standby letters of credit 22.0 14.6 5.8 1.1 - 0.5
Total commitments and guarantees
(1) Certain of our derivative contracts meet the definition of a guarantee and are therefore included in the above table. For additional information on commitments, see Note 22 in our consolidated financial statements. We have agreed to reimburse Berkshire Hathaway for up to one-half of any losses incurred under a$1.5 billion surety policy securing outstanding commercial paper issued by an affiliate of Berkadia. As ofNovember 30, 2020 , the aggregate amount of commercial paper outstanding was$1.47 billion . This commitment is not included in the table above as the timing of payments, if any, is uncertain. In the normal course of business, we engage in other off-balance sheet arrangements, including derivative contracts. Neither derivatives' notional amounts nor underlying instrument values are reflected as assets or liabilities in the Consolidated Statements of Financial Condition. Rather, the fair values of derivative contracts are reported in the Consolidated Statements of Financial Condition as Financial instruments owned, at fair value or Financial instruments sold, not yet purchased, at fair value as applicable. Derivative contracts are reflected net of cash paid or received pursuant to credit support agreements and are reported on a net by counterparty basis when a legal right of offset exists under an enforceable master netting agreement. For additional information about our accounting policies and our derivative activities see Notes 2, 4 and 5 in our consolidated financial statements. We are routinely involved with variable interest entities ("VIEs") in the normal course of business. AtNovember 30, 2020 , we did not have any commitments to purchase assets from our VIEs. For additional information regarding VIEs, see Notes 7 and 8 in our consolidated financial statements. 55 -------------------------------------------------------------------------------- Critical Accounting Estimates The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could significantly differ from those estimates. We believe that the following discussion addresses our most critical accounting estimates, which are those that are important to the presentation of our financial condition and results of operations and require our most difficult, subjective and complex judgments. Fair Value of Financial Instruments - Financial instruments owned, at fair value and Financial instruments sold, not yet purchased, at fair value are recorded at fair value, either as required by accounting pronouncements or through the fair value option election. Gains and losses on Financial instruments owned, at fair value and Financial instruments sold, not yet purchased, at fair value are recognized in the Consolidated Statements of Operations in Principal transactions. Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). In determining fair value, we maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. We apply a hierarchy to categorize our fair value measurements broken down into three levels based on the transparency of inputs as follows: Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reported date. Valuation adjustments
and block discounts
are not applied to Level 1 instruments.
Level 2: Pricing inputs other than quoted prices in active markets, which are either
directly or indirectly observable at the reported date. The nature of these
financial instruments includes cash instruments for which quoted prices are
available but traded less frequently, derivative instruments for which fair
values have been derived using model inputs that are directly observable in the
market, or can be derived principally from or corroborated by observable market
data, and instruments that are fair valued using other financial instruments,
the parameters of which can be directly observed.Level 3: Instruments that have little to no pricing observability as of the reported
date. These financial instruments are measured using management's best estimate of
fair value, where the inputs into the determination of fair value require
significant management judgment or estimation.
Fair value is a market based measure; therefore, when market observable inputs
are not available, our judgment is applied to reflect those judgments that a
market participant would use in valuing the same asset or liability. The
availability of observable inputs can vary for different products. We use prices
and inputs that are current as of the measurement date even in periods of market
disruption or illiquidity. The valuation of financial instruments classified in
Level 3 of the fair value hierarchy involves the greatest amount of management
judgment.
Jefferies Group's Independent Price Verification Group , independent of its
trading function, plays an important role in determining that financial
instruments are appropriately valued and that fair value measurements are
reliable. This is particularly important where prices or valuations that require
inputs are less observable. In the event that observable inputs are not
available, the control processes are designed to assure that the valuation
approach utilized is appropriate and consistently applied and that the
assumptions are reasonable. Where a pricing model is used to determine fair
value, these control processes include reviews of the pricing model's
theoretical soundness and appropriateness by risk management personnel with
relevant expertise who are independent from the trading desks. In addition,
recently executed comparable transactions and other observable market data are
considered for purposes of validating assumptions underlying the model.
For further information on the fair value definition, Level 1, Level 2, Level 3
and related valuation techniques, see Notes 2 and 4 in our consolidated
financial statements.
Income Taxes - We record a valuation allowance to reduce our net deferred tax
asset to the amount that is more likely than not to be realized. We are required
to consider all available evidence, both positive and negative, and to weigh the
evidence when determining whether a valuation allowance is required and the
amount of such valuation allowance. Generally, greater weight is required to be
placed on objectively verifiable evidence when making this assessment, in
particular on recent historical operating results.
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We also record reserves for unrecognized tax benefits based on our assessment of
the probability of successfully sustaining tax filing positions. Management
exercises significant judgment when assessing the probability of successfully
sustaining tax filing positions, and in determining whether a contingent tax
liability should be recorded and if so, estimating the amount. If our tax filing
positions are successfully challenged, payments could be required that are in
excess of reserved amounts or we may be required to reduce the carrying amount
of our net deferred tax asset, either of which could be significant to our
Consolidated Statements of Financial Condition or results of operations.
Impairment of Long-Lived Assets - We evaluate our long-lived assets for
impairment whenever events or changes in circumstances indicate, in management's
judgment, that the carrying value of such assets may not be recoverable. When
testing for impairment, we group our long-lived assets with other assets and
liabilities at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities (or asset
group). The determination of whether an asset group is recoverable is based on
management's estimate of undiscounted future cash flows directly attributable to
the asset group as compared to its carrying value. If the carrying amount of the
asset group is greater than the undiscounted cash flows, an impairment loss
would be recognized for the amount by which the carrying amount of the asset
group exceeds its estimated fair value.
Due to a decline in oil and gas prices during the second quarter of 2020,
Vitesse Energy Finance performed impairment analyses on its proven oil and gas
properties in the DJ Basin of Wyoming and Colorado and the Bakken Shale oil
field in North Dakota . Vitesse Energy Finance first determined the estimated
undiscounted cash flows based on the reserves and costs utilized in its reserve
report and then updated those cash flows based on strip pricing as of May 31,
2020 . The expected undiscounted future net cash flows were then compared to the
end of quarter net carrying value of the oil and gas properties. No impairment
of the Bakken Shale oil field assets was necessary as the undiscounted future
net cash flows significantly exceeded the carrying value of these assets. As
undiscounted future net cash flows were lower than the carrying value of the DJ
Basin properties, Vitesse Energy Finance then determined the estimated fair
value of the proven properties. To measure the estimated fair value of its
proven properties, Vitesse Energy Finance used unobservable Level 3 inputs,
including a 10.0% discount rate and estimated future cash flows from its reserve
report. The estimated fair value of Vitesse Energy Finance's proven oil and gas
properties in the DJ Basin totaled $26.8 million , which was $13.2 million lower
than the carrying value as of the end of the second quarter of 2020. As a
result, an impairment charge of $13.2 million was recorded in Selling, general
and other expenses during 2020.
Due to a decline in oil and gas prices during the first quarter of 2020, JETX
Energy performed an impairment analysis for its oil and gas properties in the
East Eagle Ford . JETX Energy first determined the estimated undiscounted cash
flows based on the reserves and costs utilized in its reserve report and then
updated those cash flows based on strip pricing as of February 29, 2020 . The
expected undiscounted future net cash flows were then compared to the end of
quarter net carrying value of the proven properties. As the undiscounted future
net cash flows were lower than the carrying value, JETX Energy then determined
the estimated fair value of the proven properties. To measure the estimated fair
value of its proven properties, JETX Energy used unobservable Level 3 inputs,
including a 10.0% discount rate and estimated future cash flows from its reserve
report. The estimated fair value of JETX Energy's proven oil and gas properties
in the East Eagle Ford totaled $9.6 million , which was $33.0 million lower than
the carrying value as of the end of first quarter of 2020. As a result, an
impairment charge of $33.0 million was recorded in Selling, general and other
expenses during 2020.
Impairment of Equity Method Investments - We evaluate equity method investments
for impairment when operating losses or other factors may indicate a decrease in
value which is other than temporary. We consider a variety of factors including
economic conditions nationally and in their geographic areas of operation,
adverse changes in the industry in which they operate, declines in business
prospects, deterioration in earnings, increasing costs of operations and other
relevant factors specific to the investee. Whenever we believe conditions or
events indicate that one of these investments might be significantly impaired,
we obtain from such investee updated cash flow projections. We use this
information and, together with discussions with the investee's management and
comparable public company analysis, evaluate if the book value of its investment
exceeds its fair value, and if so and the situation is deemed other than
temporary, record an impairment charge.
As described further in Note 9, in the third quarter of 2018 we engaged an
independent valuation firm to assist management in estimating the fair value of
our equity investment in Golden Queen. Our estimate of fair value was based on a
discounted cash flow analysis and is categorized within Level 3 of the fair
value hierarchy. The discounted cash flow valuation model used inputs including
management's projections of future Golden Queen cash flows and a discount rate
of 12%. The estimated fair value of our equity investment in Golden Queen was
$62.3 million , which was $47.9 million lower than our prior carrying value at
the end of the second quarter 2018. As a result, an impairment charge of $47.9
million was recorded in Income (loss) related to associated companies in the
third quarter of 2018.
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During the fourth quarter of 2018, we recorded an impairment charge of $62.1
million related to the equity component of our investment in FXCM, which was
based on updated expectations that had been impacted by the then revised
regulations of the European Securities Market Authority and dampened operating
results. Based on the updated projections, we evaluated in the fourth quarter of
2018 whether our equity method investment was fully recoverable. We engaged an
independent valuation firm to assist management in estimating the fair value of
FXCM. Our estimate of fair value was based on a discounted cash flow analysis.
The result of our analysis indicated that the estimated fair value of our equity
interest in FXCM was lower than our carrying value by $62.1 million . We
concluded that based on the decline in projections and the adverse effects of
the European regulations, that the decline in fair value of our equity interest
was other than temporary. As a result, we impaired our equity investment in FXCM
in the fourth quarter of 2018 by $62.1 million .
HomeFed has a 49% membership interest in the RedSky JZ Fulton Mall joint
venture, which owns a property in Brooklyn, New York . The property consists of
14 separate tax lots, divided into two development sites which may be
redeveloped with buildings consisting of up to 540,000 square feet of floor area
development rights. During the first quarter of 2020, difficulties were
encountered with attempts to refinance debt within the investment. We viewed
this, combined with a softening of the Brooklyn, New York real estate market
during the quarter, as a triggering event and evaluated HomeFed's equity method
investment in RedSky JZ Fulton Mall to determine if there was an impairment. In
connection with this evaluation, we obtained an appraisal which reflected a
reduction in the value of the investment in comparison to an earlier appraisal
obtained shortly before the beginning of the quarter. The appraisal was based
off of Level 3 inputs consisting of prices of comparable properties and the
appraisal indicated that the value of the property was worth less than the debt
outstanding. HomeFed recorded an impairment charge of $55.6 million within
Income (loss) related to associated companies during 2020, which represented all
of its carrying value in the joint venture.
Goodwill - We allocate the acquisition cost of consolidated businesses to the
specific tangible and intangible assets acquired and liabilities assumed based
upon their fair values. Significant judgments and estimates are often made by
management to determine these values, and may include the use of appraisals,
consideration of market quotes for similar transactions, use of discounted cash
flow techniques or consideration of other information we believe to be
relevant. Any excess acquisition cost over the fair values of the net assets
acquired is recorded as goodwill, which is not amortized to
expense. Substantially all of our goodwill was recognized in connection with the
Jefferies Group acquisition.
At least annually, and more frequently if warranted, we assess whether goodwill
has been impaired at the reporting unit level. In testing for goodwill
impairment, we have the option to first assess qualitative factors to determine
whether the existence of events or circumstances lead to a determination that it
is more likely than not that the fair value of a reporting unit is less than its
carrying amount. If, after assessing the totality of events and circumstances,
we conclude that it is not more likely than not that the fair value of a
reporting unit is less than its carrying amount, then performing the two-step
impairment test is not necessary. If we conclude otherwise, we are required to
perform the two-step quantitative impairment test. In the first step, the fair
value of each reporting unit is compared with its carrying value, including
goodwill and allocated intangible assets. If the fair value is in excess of the
carrying value, the goodwill for the reporting unit is considered not to be
impaired. If the fair value is less than the carrying value then a second step
is performed in order to measure the amount of the impairment loss, if any,
which is based on comparing the implied fair value of the reporting unit's
goodwill to the carrying value. We adopted Accounting Standards Update No.
2017-04 on December 1, 2020 , which simplifies goodwill impairment testing by
eliminating the second step of the impairment test noted above. If the total
carrying value of a reporting unit exceeds the fair value, an impairment charge
would be recorded to goodwill for the difference between the carrying value and
the fair value.
The fair values are based on valuation techniques that we believe market
participants would use, although the valuation process requires significant
judgment and often involves the use of significant estimates and
assumptions. The methodologies we utilize in estimating fair value include
price-to-earnings and price-to-book multiples of comparable public companies
and/or projected cash flows. In addition, as the fair values determined under a
market approach represent a noncontrolling interest, we applied a control
premium to arrive at the estimated fair value of our reporting units on a
controlling basis. The estimates and assumptions used in determining fair value
could have a significant effect on whether or not an impairment charge is
recorded and the magnitude of such a charge. Adverse market or economic events
could result in impairment charges in future periods.
An independent valuation specialist was engaged to assist with the valuation
process relating to the Investment Banking and Capital Markets, and Asset
Management segments for our annual goodwill impairment test as of August 1,
2020 . The results of our annual goodwill impairment test for both the Investment
Banking and Capital Markets segment and the Asset Management segment did not
indicate any goodwill impairment.
Intangible Assets - Intangible assets deemed to have finite lives are generally
amortized on a straight-line basis over their estimated useful lives, where the
useful life is the period over which the asset is expected to contribute
directly, or indirectly, to our future cash flows. Intangible assets are
reviewed for impairment on an interim basis when certain events or circumstances
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exist. If future undiscounted cash flows are estimated to be less than the
carrying amounts of the asset groups used to generate those cash flows in
subsequent reporting periods, particularly for those with large investments in
amortizable intangible assets, impairment charges would have to be recorded.
An intangible asset with an indefinite useful life is not amortized but assessed
for impairment annually, or more frequently, when certain events or
circumstances exist indicating an assessment for impairment is
necessary. Impairment exists when the carrying amount exceeds its fair
value. Fair value is determined using valuation techniques consistent with what
a market participant would use. All of our indefinite-lived intangible assets
were recognized in connection with the 2013 Jefferies Group acquisition, which
consists of exchange and clearing organization membership interests and
registrations. Our annual impairment testing date was August 1, 2020 . At August
1, 2020 , we elected to perform a quantitative assessment of membership interests
and registrations that have available quoted sales prices as well as certain
other membership interests and registrations that have declined in utilization.
Qualitative assessments were performed on the remainder of our indefinite-life
intangible assets. In applying our quantitative assessment at August 1, 2020 , we
recognized immaterial impairment losses on certain exchange membership interests
and registrations. With regard to our qualitative assessment of the remaining
indefinite-life intangible assets, based on our assessment of market conditions,
the utilization of the assets and the replacement costs associated with the
assets, we concluded that it is not more likely than not that the intangible
assets are impaired.
Contingencies - In the normal course of business, we have been named, from time
to time, as a defendant in legal and regulatory proceedings. We are also
involved, from time to time, in other exams, investigations and similar reviews
(both formal and informal) by governmental and self-regulatory agencies
regarding our businesses, certain of which may result in judgments, settlements,
fines, penalties or other injunctions.
We recognize a liability for a contingency when it is probable that a liability
has been incurred and the amount of loss can be reasonably estimated. If the
reasonable estimate of a probable loss is a range, we accrue the most likely
amount of such loss, and if such amount is not determinable, then we accrue the
minimum in the range as the loss accrual. The determination of the outcome and
loss estimates requires significant judgment on the part of management, can be
highly subjective and is subject to significant change with the passage of time
as more information becomes available. Estimating the ultimate impact of
litigation matters is inherently uncertain, in particular because the ultimate
outcome will rest on events and decisions of others that may not be within our
power to control. We do not believe that any of our current litigation will have
a significant adverse effect on our consolidated financial position, results of
operations or liquidity; however, if amounts paid at the resolution of
litigation are in excess of recorded reserve amounts, the excess could be
significant in relation to results of operations for that period. For further
information, see Note 22 in our consolidated financial statements.
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