OREANDA-NEWS. Fitch Ratings has affirmed Jefferies Group LLC's (Jefferies) Long-term Issuer Default Rating (IDR) at 'BBB-' and Short-term IDR at 'F3'. The Rating Outlook remains Stable. A full list of rating actions follows at the end of this release.

Fitch has also affirmed Leucadia's ratings today. The Rating Outlook is Stable. For more information, please see the Rating Action Commentary titled 'Fitch Affirms Leucadia at 'BBB-'; Outlook Stable' dated Feb. 29, 2016.

KEY RATING DRIVERS

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 46.3% of Leucadia's tangible common equity as of Dec. 31, 2015), shared leadership between the two companies, and the likely role Jefferies will continue to play in the combined company's future strategic direction.

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 recent operating performance. Moderate key man risk and reliance on secured wholesale funding are additional rating constraints.

Jefferies' revenues continue to be driven by investment banking (equity & debt capital markets and advisory) which accounted for 58.1% of net revenues in fiscal year 2015 (FY15) up from 40.6% in 2010. Fixed income sales and trading accounted for only 10.9% of net revenues in FY15 versus 33.2% in 2010, challenged by continued lower trading volume and higher price volatility driven by interest rate uncertainty and stress in the energy sector.

In response to these challenges, Jefferies initiated a strategic refocusing of the fixed income business, reducing its consolidated balance sheet to $38.5 billion in the fourth quarter 2015 (4Q15), an absolute reduction of $4.2 billion versus the prior quarter, which included a $2.3 billion reduction in long securities inventory. In connection with this inventory reduction, Jefferies net exposure to distressed energy was reduced to $37 million from $70 million in 3Q15. Fitch views this risk reduction of more volatile sales and trading businesses as prudent in the face of recent volatility. The relative stability of capital markets and advisory activities which are more fee-based, less balance sheet intensive and require less capital is also noted. However, capital markets and advisory business are dependent on financial market and macro-economic conditions, which tend to be cyclical. Given these dynamics, some uncertainty remains around the trajectory of profitability going forward, and the extent to which capital will be redeployed.

As of Nov. 30, 2015, Jefferies had substantially completed the unwind of the Bache commodities and futures brokerage and clearing businesses which was acquired in 2011. The firm completed the exit within expectations of costs. In 2015, Jefferies incurred pre-tax losses of $135 million and a net operating loss, including wind down costs, of $90 million with respect to Bache and expects remaining exit costs in 2016 to be less than $5 million. As of Nov. 30, 2015, Bache was using only $45 million of Jefferies' balance sheet (down from $4.2 billion as of Nov 30, 2014). While Fitch views the acquisition as a strategic misstep, the divestment of Bache is viewed positively going forward as it will reduce the continued drag on earnings and allow the firm to redeploy capital to core businesses.

Jefferies Finance LLC (JFIN), the commercial finance joint venture (JV) with Babson Capital Management LLC and Massachusetts Mutual Life Insurance Company, continued to grow its assets in 2015 (up 22% to $7.3 billion from $5.9 billion in 2014), albeit at a slower pace than its average annual growth rate of 63% between 2010 - 2014. JFIN's leverage, calculated as debt divided by equity, measured 6.1x at Nov. 30, 2015 up from 4.8x a year earlier, 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 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. Leverage ratios, which had modestly increased between 2012 and 2014, decreased in 4Q15 commensurate with the reduction in securities inventory. On a gross basis, tangible assets to tangible equity measured 10.2x at fiscal-year end 2015, down from 12.0x in 2014 and 11.1x in 2013. 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 7.2x in 2015, down from 8.9x in 2014 and 8.5x in 2013. Leverage is expected to stay at or near current levels in the near-term, however, underwriting activities from investment banking may result in higher leverage between financial reporting dates. Fitch will monitor the extent to which Jefferies re-levers the balance sheet over the longer term based on market opportunity.

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 $5.08 billion at Nov. 30, 2015, down from $5.50 billion at Nov. 30, 2014 but up as a percent of total tangible assets, represented 13.9% of total tangible assets, up from 12.9% in 2014. Cash and cash equivalents represented 9.6% of total tangible assets as of Nov. 30, 2015, in-line with 9.6% at Nov. 30, 2014. While these ratios are lower relative to comparable metrics at higher-rated peers, Fitch considers the ratios to be consistent with Jefferies' ratings.

Jefferies annual earnings performance was generally consistent from 2009 - 2013 but recent results have been weaker. FY15 was characterized by performance volatility in the company's distressed debt trading business and elevated costs associated with the divestiture of the Bache futures and commodities business. Positive contributors to Jefferies' earnings for the year were investment banking and equity sales and trading businesses. Excluding the impact of the divested Bache business, which had a pre-tax operating loss of $141.5 million in FY15, adjusted pre-tax income was $255.7 million (compared to $417.0 million in 2014). Earnings margins continue to trail peers with adjusted pre-tax profit margin measuring 10.3% (compared to 13.9% in 2014). Lower profitability figures adjusted to exclude Bache, reflect challenges in the fixed income business, which Jefferies has taken steps to address.

In 4Q15, Jefferies' average daily VaR was $9.72 million, down from $12.75 million in 2014, and as a percentage of Fitch Core Capital, measured 0.27%, down from 0.36% in 2014. Fitch Stressed VaR measured $396.8 million or 10.99% of Fitch Core Capital, down from $440.0 million or 12.4% of Fitch Core Capital. VaR decreases reflect Jefferies reduction in balance sheet in 4Q15 as well as a 30% reduction in Jefferies stake in KCG Holdings Inc. (KCG) through a June tender offer. Since 3Q'12, Jefferies' VaR calculations have been impacted by the KCG investment held on Jefferies' balance sheet. Jefferies' risk posture as reflected by VaR is considered moderate and is back to pre-2014 levels where it is likely to remain in near-term given the recent de-risking.

RATING SENSITIVITIES

Positive rating momentum is viewed as limited until there is greater clarity with respect to the profitability of Jefferies business mix, particularly its sales and trading activities. Thereafter, positive rating drivers over the longer term could include improvement and stability in profitability and 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 further material trading or operational losses, 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.

Since the ratings of Leucadia and Jefferies are currently equalized due to the strong linkages between the two companies and the likely role Jefferies will play in Leucadia's future strategic direction, a change in Jefferies's ratings and/or Outlook would influence Leucadia's ratings and/or Outlook. The unanticipated departure of key executives at either Jefferies or Leucadia could result in negative rating pressure.

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 Nov. 30, 2015, Jefferies had U.S. GAAP total assets of $38.5 billion and shareholders' equity of $5.5 billion (including non-controlling interests and $1.9 billion of goodwill and intangibles).

The rating actions are as follows:

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 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-'.

Station Place Securitization Trust, Series 2015-1
--Senior secured notes at 'F3'.

Station Place Securitization Trust, Series 2015-2
--Senior secured notes at 'BBB-'.

Station Place Securitization Trust, Series 2015-3
--Senior secured notes at 'F3'.

Station Place Securitization Trust, Series 2015-4
--Senior secured notes at 'BBB-'.