Fitch Ratings has placed Leucadia National Corporation's (Leucadia) Long-term Issuer Default Rating (IDR) on Rating Watch Positive. A full list of ratings follows at the end of this press release.
Today's action follows Leucadia's announcement that it has entered into a definitive agreement to merge with Jefferies Group Inc. (rated 'BBB'/ Rating Watch Negative by Fitch). Fitch expects to resolve the Rating Watch Positive once the merger is completed in the first quarter of 2013. Assuming the transaction is completed, and absent material adverse credit developments in the interim, the outcome is expected to result in a two notch upgrade of Leucadia's rating to 'BBB-'.
The expected upgrade of Leucadia's rating reflects Leucadia's highly liquid and lowly leveraged balance sheet, which the new management team from Jefferies has represented that it is committed to maintaining. Additionally, a wholly owned Jefferies is expected to be a source of strength to Leucadia in terms of deal flow and expertise. The ratings going forward are expected to be aligned with those of Jefferies owing to the potential for capital flows between the two entities.
Under Fitch's criteria 'Rating FI Subsidiaries and Holding Companies', Jefferies would be considered a core subsidiary based on its significance relative to Leucadia's equity and the likely role it will play in its future strategic direction. Key executive management will be shared by both firms despite the separate Boards of Directors. Management has discretion to move capital between Jefferies and Leucadia, although they are not expected to under normal market conditions.
While the formal retirement of Ian Cumming from Leucadia in conjunction with the merger is a credit negative in terms of his investment experience, track record and industry relationships, Fitch takes comfort in Joe Steinberg remaining highly involved as Chairman of the Board. Furthermore, Fitch has been sensitive to looming succession planning issues in recent years, and the proposed merger, with Joseph Steinberg remaining as Chairman and the introduction of the Jefferies executive management team alleviates these concerns in the near- to intermediate term.
Post-merger, Jefferies' and Leucadia's ratings are expected to be equalized and given the ratings linkage, any material changes in either credit profile will have an impact on both ratings. The 'BBB-' rating would reflect the proposed operating parameters articulated by Jefferies and Leucadia management, including:
--Maintaining Leucadia's debt-to-equity ratio below 0.5x, assuming Leucadia's two largest investments are fully impaired and the DTA is excluded from the calculation;
--Maintaining Leucadia's ratio of minimum liquid assets to parent company debt below 1.0x;
--Maintaining Leucadia's minimum cash and equivalents of at least 10% of book value (excluding Jefferies); and
--Limiting Leucadia's single largest investment to 20% of book value with all other investments limited to 10% of book value (both excluding Jefferies).
RATING DRIVERS AND SENSITIVITIES
After completion of the merger, Fitch would view a firm commitment to a conservative liquidity profile, limited investment concentrations and reduced leverage at the parent company, as well as maintenance or improvement of Jefferies' current credit profile over the long term as positive rating drivers. The interaction between Jefferies and Leucadia will play an important role in the longer-term value and risk profile of the combined franchise, in Fitch's view.
Jefferies' and Leucadia's ratings could be negatively impacted by an increase in leverage, a less conservative liquidity or funding profile or more aggressive growth strategy at either entity. Ratings would also be negatively impacted if Fitch perceives the risks taken in Leucadia's investment portfolio as increasing materially from current levels. Fitch will continue to assess the ability of Jefferies' management team to run both companies effectively. Furthermore, unanticipated departure of key executives at either Jefferies or Leucadia could result in negative actions.
Leucudia is a merchant bank with roughly $9 billion in assets and $6
billion in book equity. The company has been managed by partners Ian
Cumming and Joseph Steinberg since 1978.
Jefferies, a Delaware-incorporated holding company, is a well-established full service investment bank and institutional securities firm serving middle-market clients and investors. Its primary broker/dealer operating subsidiary, Jefferies & Company, Inc. holds the vast majority of the firm's consolidated assets and is regulated by the SEC. At Aug. 31, 2011 Jefferies had US GAAP total assets of $45.1 billion, shareholders' equity of $3.5 billion (including noncontrolling interests) and net income of $236.2 million.
Fitch has placed the following Leucadia ratings on Rating Watch Positive:
--Long-term IDR 'BB';
--Senior unsecured debt 'BB';
--Senior Subordinated debt 'BB-';
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Investment Manager and Alternative Funds Criteria' (Dec. 23. 2011);
--'Securities Firms Criteria' (Aug. 15, 2012);
--'Jefferies Group, Inc. Full Rating Report' (Aug. 1, 2011);
--'Leucadia National Corp.' Credit Update (March 14, 2012).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Investment Manager and Alternative Funds Criteria
Securities Firms Criteria
Credit Analysis: Leucadia National Corp.
Brandon Bajema, CPA, CFA, +1-312-606-2332
70 W. Madison Street
Chicago, IL 60602
Paul Ryndak, CFA, +1-312-606-3194
Brian Bertsch, +1-212-908-0549