OREANDA-NEWS. Jefferies Group LLC (Jefferies) today reported its second consecutive quarter of weak financial results, as continued low trading volatility and slower capital markets activity impacted both its investment banking and sales and trading business segments, according to Fitch Ratings. The results represent a sequential improvement from the prior quarter (fourth quarter 2014 [4Q'14]), that was characterized by a number of non-recurring events related to the Bache futures and commodities business. Earnings were also meaningfully weaker compared to the prior year period (1Q'14). Jefferies weak performance may also signal 1Q'15 challenges for the capital markets businesses of other, larger trading banks, although Jefferies' different reporting period and more concentrated business model may limit the degree of comparability.

Fitch notes that the first quarter is seasonally the strongest quarter of the year for most securities firms and if current conditions persist, it may not bode well for the rest of the year. The current results do not have an immediate impact on Jefferies' 'BBB-/F3' ratings or Stable Outlook, which were recently affirmed on March 5, 2015, as the ratings take into account the firms' earnings volatility and inherently cyclical nature of its business. However, sustained underperformance in core business segments that suggests more of a structural shift in performance rather than a cyclical one could lead to negative rating pressure. For additional details on Fitch's rating rationale, please see the Rating Action Commentary titled ' Fitch Affirms Jefferies Long- and Short-Term IDRs at 'BBB-/F3'; Outlook Stable'; dated March 5, 2015.

Quarterly net revenues of \$592 million were down 34.2% from the prior year period, which was a record quarter for the firm, but up 13% from the weak linked quarter. All of Jefferies' business segments experienced continued weakness during the first quarter, with the biggest declines in the Fixed Income Trading and Debt Capital Markets segments. Total Sales & Trading net revenues were down 30.6% from the prior year period, while Investment Banking revenues declined 34.4%. Fixed income trading activity was impacted by uncertainty around rising rates in the U.S. and negative rates in Europe, which kept bond buyers at bay, whereas debt capital markets was impacted by slowdown in leveraged finance new issuance. While fixed income trading markets appear to have stabilized so far in March and M&A activity seems to be picking up, Fitch continues to have a cautious outlook for the rest of 2015 as market conditions remain uncertain, given the potential for a rate rise in mid-2015.

Jefferies' 1Q'15 net income of \$11.7 million was an improvement over the net loss reported in 4Q'14, but was down 89.6% from the prior year period. The Asset Management segment, which is being de-emphasized at the Jefferies level but is increasing at the parent company (Leucadia) level, reported a net loss of \$9.9 million. The loss was driven by underperformance of certain fund investments, partially offset by performance-related fee income. Jefferies continues to consolidate its asset management activities at the Leucadia level, which should reduce any impact from this segment going forward.

The Bache futures and commodity business, which is under strategic review, reported a narrower operating loss of \$13 million in 1Q'15, compared to a loss of \$131.8 million reported last quarter due to sizeable one-time items, and a loss of \$14.3 million in the prior year period. The sale or exit of the Bache business should reduce the continued drag on the firm's earnings, and allow it to redeploy balance sheet/capital and resources to some of its core businesses.

The firm's risk appetite remained relatively consistent, as evidenced by a modest decline in balance sheet and modest increase in firm-wide value-at-risk (VaR). Jefferies' average assets during 1Q'15 declined by a modest 2.3% and stood at \$49.8 billion. Firm-wide VaR modestly increased to \$13.3 million in 1Q'15, from \$12.7 million in 4Q'14. Adjusted leverage ratio decreased to 10.1x as of Feb. 28, 2015 from 10.4x as of Nov. 30, 2014. Fitch continues to view Jefferies' leverage and VaR levels as relatively conservative. The liquidity buffer declined to 10.6% in 1Q'15, from 12.4% from 4Q'14, consistent with historical seasonal declines as a result of cash bonus payments.

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. At Feb. 28, 2015, Jefferies had U.S. GAAP total assets of \$43.7 billion and shareholders' equity of \$5.5 billion (including non-controlling interests and \$2 billion of goodwill). Fitch considers Jefferies to be a core subsidiary of Leucadia based on Jefferies' significance relative to Leucadia's equity and the likely role it will play in the combined company's future strategic direction.