JEFFERIES FINANCIAL GROUP INC.
Fitch Ratings has assigned an unsecured debt rating of 'BBB+' to
Proceeds from the issuance are expected to be used for general corporate purposes.
Key Rating Drivers
The unsecured debt ratings are equalized with the Long-Term Issuer Default Rating (IDR) and reflect the firm's largely unsecured corporate funding profile and Fitch's expectation for average recovery prospects on the debt under a stressed scenario. The debt issuance represents a senior unsecured obligation of JFG, ranking pari passu with existing senior unsecured debt.
Net adjusted leverage, defined by Fitch as tangible assets excluding securities borrowed and reverse repurchase agreements, divided by tangible common equity (TCE), was 5.7x at
JFG's ratings reflect its franchise and strong market position, full-service capabilities as an investment banking (IB) and capital markets firm, increased fee revenue from the asset management business and consistently conservative leverage and liquidity. Additionally, JFG continues to monetize its legacy merchant banking investments, which Fitch views favorably as it will reduce earnings volatility going forward. JFG's ratings remain constrained by the inherent earnings variability in IB, reliance on short-term secured funding and elevated operational risk associated with the securities firm business model.
The Stable Outlook reflects Fitch's expectations for solid operating performance through the cycle given the firm's established franchise, the maintenance of a solid risk management framework, and conservative leverage and liquidity positions.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Sustained decline in profitability as measured by four-year average ROAE below 10%, particularly if driven by trading losses taken in the capital markets business;
Alteration of the firm's risk profile, resulting in outsized performance volatility or material trading/credit losses;
Sustained increase in net leverage to over 7.5x; and/or
Deterioration in the firm's liquidity and funding profile as evidenced by a decline in the liquid assets to short-term funding ratio below 150%; and/or increased risk appetite at joint ventures (
A key person event with respect to the CEO and/or President would not necessarily result in an immediate downgrade, but would be evaluated in the context of the potential impact on the firm's strategic direction. The fact that key person risk resides with two individuals, rather than one, is a potential mitigant.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Positive rating momentum is considered limited given the sensitivity of the business model to market and funding risks. However, significant growth in the asset management business that results in a meaningful contribution to consolidated revenues in conjunction with sustained improvement in profitability as measured by four-year average ROAE to over 15%, sustained maintenance of leverage under 5.0x, and an increase in the liquid assets to short-term funding ratio to over 200% and would be positive for ratings.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The unsecured debt ratings are equalized with the Long-Term IDR and are expected to move in tandem. The rating of JFG's cumulative convertible preferred stock is primarily sensitive to JFG's IDR.
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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