OREANDA-NEWS. Fitch Ratings has affirmed Jefferies Group LLC's (Jefferies) long-term Issuer Default Rating (IDR) at 'BBB-' and its short-term IDR at 'F3'. The Rating Outlook remains Stable. A full list of rating actions is listed at the end of this rating action commentary.

The ratings of Jefferies and its parent company, Leucadia National Corporation (Leucadia) continue to be equalized, as Fitch considers Jefferies a core subsidiary of Leucadia. This is based on Jefferies' significance relative to Leucadia's balance sheet (Jefferies accounted for 42% of Leucadia's common equity, ex-goodwill and intangibles, as of Dec. 31, 2014), the strong operational linkages between the two companies including shared leadership, and the likely role Jefferies will play in the combined company's future strategic direction.

Fitch has also affirmed Leucadia's ratings with a Stable Outlook today. For more information on this affirmation, please see the Rating Action Commentary titled 'Fitch Affirms Leucadia's Long-Term IDR at 'BBB-'; Outlook Stable' dated March 5, 2014.

KEY RATING DRIVERS

The affirmation of Jefferies' ratings reflects the company's established franchise in the middle-market investment banking space, conservative leverage and liquidity profile, and solid risk management. Rating constraints include variability in the firm's earnings given its reliance on sales and trading and investment banking revenues, both of which tend to be market-dependent, and relatively weak operating performance with subpar returns on equity. Moderate key man risk and reliance on secured wholesale funding are additional rating constraints.

Jefferies' revenue mix has shifted over the years, with fixed income sales and trading accounting for 25.3% of net revenues in fiscal year 2014 (FY14) versus 54.4% in 2009. The offset has been an increase in investment banking (equity & debt capital markets and advisory) revenues, which accounted for 50.9% of net revenues in FY14, up from 21.9% in FY09. Fitch views this shift positively as sales and trading revenues tend to be more volatile, whereas capital markets and advisory revenues are more fee-based, less-riskier and require less capital; however, capital markets and advisory business are dependent on financial market and macro-economic conditions, which tend to be cyclical.

Growth in Jefferies' advisory business has also contributed to growth in Jefferies Finance LLC (JFIN), the commercial finance joint venture (JV) with Babson Capital Management LLC and Massachusetts Mutual Life Insurance Company, which provides leveraged financing to middle-market corporate companies.

JFIN has continued to increase its market share within this segment and has been increasing the average size of its commitment. Total volume arranged by JFIN increased to \$23.3 billion in 2014, up 11% from \$21.1 billion in 2013, and up five times from \$3.8 billion in 2010. The leveraged finance market more recently has been characterized by intense competition and loosened underwriting standards, which raises the risk profile for lenders active within this sector. However, JFIN's credit quality has been solid so far, with modest charge-offs since inception. JFIN's leverage, calculated as debt divided by equity, measured 4.8x at Nov. 30, 2014, up from 3.5x a year earlier. Management has articulated a leverage target of 4.0x-5.0x for JFIN, which Fitch believes to be relatively high on a stand-alone basis.

While JFIN's debt is not recourse to Jefferies, it does further leverage Jefferies equity investment in JFIN and creates potential reputational risk associated with a default of JFIN. Fitch expects Jefferies will continue to carefully manage the credit, market and liquidity risk associated with JFIN. Increased risk appetite at JFIN, as measured by higher balance sheet leverage, larger deal commitments, and/or weakening credit quality could pressure Jefferies' ratings.

At the Jefferies level, the firm continues to maintain a relatively conservative leverage and liquidity profile after its merger with Leucadia. Leverage ratios have modestly increased over the last three years as the firm has taken advantage of dislocation in the sector to gain market share. On a gross basis, tangible assets to tangible equity measured 12.0x at fiscal year-end 2014, up from 11.1x in 2013, and 10.6x in 2012. Gross leverage is impacted by the firm's repurchase and stock borrowing activities, which are primarily backed by higher quality collateral including US Treasuries and government agencies. Net leverage, which excludes reverse repos and securities borrowed from tangible assets, measured 8.9x in 2014, up from 8.5x in 2013, and 8.1x in 2012. Fitch does not expect a material increase in leverage from current levels.

Robust liquidity management is key for a securities firm such as Jefferies, as it is primarily dependent on wholesale short-term secured funding sources, which are highly sensitive to negative market conditions. Liquid assets, which include cash, cash equivalents and other sources of liquid and unencumbered securities, measured \$5.50 billion at Nov. 30, 2014, up from \$5.28 million at Nov. 30, 2013. The increase was primarily driven by the EUR500 million MTN issuance in May 2014, which the company has parked in cash to repay \$500 million of senior notes coming due in November 2015. Liquidity assets represented 12.4% of total assets, and cash and cash equivalents represented 9.2% of total assets as of Nov. 30, 2014, compared to 13.1% and 8.9%, respectively at Nov. 30, 2013. While these ratios are lower relative to comparable metrics at higher-rated peers, Fitch considers it to be consistent with Jefferies' ratings.

In December 2014, Jefferies announced that it was pursuing strategic alternatives for its Bache commodities and derivatives brokerage and clearing business, which it acquired in 2011, but since has failed to gain traction. As of Nov. 30, 2014, the Bache business was using approximately \$4.2 billion of Jefferies' balance sheet and reported \$175 million in revenues for year-end 2014 (YE14; or 5.8% of Jefferies total net revenues). Excluding goodwill/intangible write-downs and bad debt expense incurred in the fourth quarter of 2014 (4Q'14), the Bache business recorded a \$100 million pre-tax loss in YE14. Fitch views the outcome of the Bache acquisition as a strategic misstep, as it was originally envisioned by Jefferies to provide it with an established derivatives and commodities platform and diversify its product offerings. However, the sale or exit of the business will reduce the continued drag on earnings, and allow the firm to redeploy balance sheet/capital and resources to some of its core businesses.

Operating performance was very volatile in 2014, with the firm reporting three consecutive quarters of higher net revenues and earnings relative to prior year's quarters (2013). However, 4Q'14 was characterized by tumultuous events caused by significant mark to market losses in its fixed income trading inventory, the goodwill/intangible impairment charge related to the Bache business, and a provision of bad debt associated with a fraud at a commodity trading counterparty, which collectively derailed the positive momentum gained in the preceding three quarters and resulted in the weakest annual earnings since 2009, highlighting the market-dependent nature of the firm's earnings.

Pre-tax income declined to \$303.1 million in 2014, down 25% from \$403.7 million in 2013, primarily driven by \$61.6 million in goodwill/intangible write-down associated the Bache business, and \$52.3 million bad debt provision related to the receivable from OW Bunker. Pre-tax margin was 10.1% in 2014, down from 13.7% in 2013, and below the five-year average of 15%. Excluding these charges, which are part non-cash and part one-time in nature, pre-tax income margin measured 13.9%. Adjusted return of average equity measured 5% in 2014, down slightly from 5.2% in 2013, and continues to trail peers.

Jefferies securities inventory levels, which primarily are comprised of fixed income securities, increased to \$18.6 billion at Nov. 30, 2014, up 12% from \$16.6 billion at Nov. 30, 2013, with the increase coming from all asset classes except mortgage-backed securities, which saw a slight decline in balance, year-over-year. The percentage of level 3 assets have stayed almost flat, measuring 2.8% of total inventory at YE14, compared to 2.7% at YE13, which is viewed positively.

As of Nov. 30, 2014, Jefferies average daily VaR was \$14.3 million including the diversification benefit and \$18.8 million excluding the diversification benefit. Since 3Q'12, Jefferies' VaR calculations have been impacted by the Knight Capital investment held on Jefferies' balance sheet. Jefferies calculated that absent this investment, average daily VaR would have been \$8.5 million for the year ended Nov. 30, 2014. Fitch continues to view the Knight Capital investment as relatively large and opportunistic, but does not expect it to have any rating implications at the current levels. However, ratings could be affected if the company continues to add materially to this position or takes other large equity stakes.

Key man risk continues to be a concern for both Leucadia and Jefferies, although Fitch recognizes that Jefferies has broadened and deepened its bench over the past several years.

RATING SENSITIVITIES

Positive rating drivers over the longer term include improvement and stability in profitability and positive operating leverage through compensation cost containment, while maintaining a conservative leverage and liquidity posture.

A material increase in leverage or a less conservative liquidity and/or funding profile could pressure Jefferies' ratings. Additional negative rating drivers could include a material operational or trading loss, sustained underperformance in core business segments, and/or increased risk appetite at JFIN, as measured by higher balance sheet leverage, larger deal commitments, and/or weakening credit quality.

Jefferies' ratings are equalized with those of Leucadia given the ownership structure and operational and management linkages between the two companies. As a result, changes in Leucadia's ratings would influence Jefferies' credit profile as well.

Jefferies, a Delaware-incorporated holding company, is a full-service investment banking and institutional securities firm primarily serving middle-market clients and investors. Its primary broker/dealer operating subsidiary, Jefferies LLC, holds the vast majority of the firm's consolidated assets and is regulated by the SEC.

Fitch has affirmed the following ratings:

Jefferies Group LLC
--Long-term IDR at 'BBB-', Outlook Stable;
--Short-term IDR at 'F3';
--Senior unsecured debt at 'BBB-';
--Short-term debt at 'F3'.

Station Place Securitization Trust, Series 2013-2
--Senior secured notes at 'BBB-'.

Station Place Securitization Trust, Series 2014-1
--Senior secured notes at 'BBB-'.

Station Place Securitization Trust, Series 2014-2
--Senior secured notes at 'BBB-'.

Station Place Securitization Trust, Series 2014-3
--Senior secured notes at 'BBB-'.

Station Place Securitization Trust, Series 2014-4
--Senior secured notes at 'BBB-'.